What is preferred stock? What are its various categories?

Question

What will be an ideal response?

Answer 1

Preferred stock is a class of stock that entitles its owner to special preferences relating either to dividends or to the distribution of assets. Most preferred stock is preferred as to dividends, meaning that in every year in which the corporation pays a dividend, the preferred shareholders are paid before the common shareholders at a rate stipulated in the articles of incorporation. Preferred stock frequently has limited voting rights. It is also generally redeemable, meaning that the corporation has the right to exchange each preferred share for a pre-specified monetary amount.
If the stock is cumulative preferred, the preferred shareholders do not lose their rights to a dividend during a year in which no dividends are paid. Rather, their rights to each year's unpaid dividends accumulate. Thus, during the next year in which dividends are paid, the preferred shareholders receive all past dividends that have accumulated plus the present year's dividend before any dividends are paid to the common shareholders.
If the stock is participating preferred, the preferred shareholders first receive their dividends at the preferred rate. The common shareholders receive dividends at the same rate. The remaining income is shared, on a pro rata basis, by the common and preferred stockholders.
If the stock is liquidation preferred, upon liquidation of the corporation, preferred shareholders receive either the par value of their stock or a specified monetary amount before the common shareholders share pro rata in the remainder of the assets. Liquidation preferences may also be participating.
Finally, preferred stock may be convertible. At the holder's request, such stock may be exchanged for common stock at a stated ratio.