preferred-stock-definition-types
Shareholder's Equity

Preferred Stock definition and its Types

Preferred Shares

The shares on which rights are provided to the shareholders to claim on dividend and liquidated value of the company prior to the common shareholders called preferred stock.

Types of preferred stocks

  • Perpetual vs Redeemable shares
  • Convertible vs Non-Convertible shares
  • Cumulative vs Non-Cumulative shares
  • Participative vs Non-Participative shares

1. Perpetual vs Redeemable preferred shares

Perpetual preferred stock

The preferred shares have a fixed maturity period called a perpetual preferred share. In this share when the maturity period ends the company returned the amounts of investors which was paid at the beginning of the period.

Redeemable shares

The shares which have no maturity period as well as which have infinite period such share called redeemable share. In this share, the company can not return the amount which was invested by the investors when they were purchased.

2. Convertible Vs Non-Convertible shares

Convertible share

In preferred shares, if there is provision to convert preferred shares into the common equity shares that type of preferred share called convertible share.

Non-Convertible share

If in preferred shares, there is no any provision to convert the preferred stock to the common equity shares that type of share called non-convertible share.

3. Cumulative Vs Non-Cumulative shares

Cumulative shares

If in the first year a company unable to earn profit and unable to pay dividends. But in the second year, the company earned profit and the company paid both years dividends to the preferred stockholders, having that type of provision preference share called cumulative stock.

Non-Cumulative shares

If in the first year a company unable to earn profit and unable to pay dividends. But the company earned profit in the second and third years. However, it does not pays the dividends of the first year (i.e. only second and third-year dividends), having such type of provision preferred share called non-cumulative stock.

4. Participative Vs Non-Participative Stocks

Participative Preferred share

The share which has provision to claim in remaining profit after distributing to the common and preferred stockholders that type of preferred share called participative stock.

Non-Participative Share

The share which has no provision to claim in remaining profit after distributing to the common and preferred stockholders that type of preferred share called non-participative stock.

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