Characteristics

• Preferred stock dividend payments must be paid prior to those remitted to common shareholders. The preferred stockholder's rights to property are also superior to common stock equity in the event of bankruptcy liquidation.
  
  Despite these ownership claims, preferred stock does not share the voting rights applicable to common. Generally, preferred shareholders are more so interested with collecting dividend income, rather than the capital appreciation of shares.
  
  

Perpetuities

• Preferred shares often trade as perpetuities, where dividends are paid out at a fixed rate with no maturity date. Prevailing interest rates influence fixed-rate preferred share prices. Market interest rates and fixed investments compete with these preferred shares for investor capital.
  
  Because of their fixed dividend payouts, perpetuity share values will not be directly affected by the economic prospects of the firm beyond bankruptcy. Fixed-rate preferred shares do not share in the upside potential of the company, outside of the corporation's status as a going concern that continues to make dividend payments.
  
  

Adjustable Rate and Participating Preferred Stock

• Adjustable rate preferred stock features dividends that are set according to formulas related to competing interest rates, such as those paid out upon treasury securities.
  
  Participating preferred stock enables holders to "participate" within the increased earnings of the firm by enabling dividend increases. Additional dividends are authorized upon participating preferred stock according to preset conditions, which are often associated with the dividend payouts and increases upon the common stock equity.
  
  

Convertible Preferred Stock

• Convertible preferred stock is convertible into common stock at a set rate. Holders usually carry the option to convert these preferred shares into common upon their own accord. However, corporations may retain provisions that allow these shares to be called and converted into common at management's discretion.
  
  

Risk vs. Reward

• The risk/reward profile of preferred stock falls between that of bonds and common stock. Adjustable-rate preferred stock dividends correspond to market interest rate levels and will exhibit the least amount of price volatility out of the preferred class. Meanwhile, the share prices of participating and fixed rate preferred shares trade according to interest rates and values will move within a band that is similar to those of corporate bonds, with small intraday swings.
  
  Convertible preferred stock performance is closely tied to common stock trading activity and is the riskiest investment of the group.