What is a Preferred Stock?

Answer:
Companies that offer stock offer one of two different

classes of stock: common stock or preferred stock. Preferred stock is a type of stock that guarantees a regular dividend. Common stocks often offer dividends however they are not guaranteed as they are with preferred stock.

Preferred stock isn’t tied to the market the way common stock is. Instead, the price of preferred stock is based on interest rate levels. As such preferred stock prices fluctuate with interest rates. If interest rates go up, prices for preferred stock go down. If interest rates fall, the price for preferred stock goes up.

One advantage of owning preferred versus common stock is that preferred stockholders get priority as far as dividend payments go. In addition, if the company is liquidated, preferred stockholders get paid before common stockholders. Should the company go bankrupt, preferred stockholders are prioritized once again getting priority distribution of assets before common stockholders.

One disadvantage to holding preferred stock is that preferred stockholders do not get voting rights in the company but common stockholders do.