A non-cumulative preferred stock is a type of preferred stock that does not entitle the holder to pay outs on dividends that were previously omitted. They are taken as the opposite of cumulative preferred stocks.
Preferred stocks may be classified into four general categories: cumulative preferred, non-cumulative preferred, convertible preferred, and participating preferred stocks. There are also other variations, such as prior preferred stocks. Preferred stocks provide holders with the privilege of being prioritized over common stock holders in the payment of dividends. The same is true in the distribution of pay outs, should the company decide to liquidate its assets. Ownership of preferred stocks does not translate into voting rights. Holders of preferred stocks may have these converted into common stocks.
Cumulative preferred stocks, as the name suggests, give holders the benefit of receiving pay outs from all previously-deferred payments on dividends. Companies which encounter financial difficulty may suspend payments until conditions improve.
The type of preferred stock determines whether or not a holder will be able to collect dividends from past pay periods. The accumulation of dividends makes cumulative preferred stocks the more profitable, and therefore the more preferable type of preferred stock among many investors.
On the other hand, issuing non-cumulative preferred shares gives banks and financial institutions a level of flexibility. This is because payments can be suspended without causing penalties to the institution. At the same time, a certain level of protection is still given to the shareholder because of the very nature of preferred stocks. Holders of non-cumulative preferred stocks are still assured that no pay outs may be issued to holders of common stock unless they are paid first.