Preferred stocks are capital stocks which produce fixed dividends which are paid out to holders before payments are issued to common stockholders. Preferred stocks also translate into partial company ownership, just like common stocks.
The main difference between preferred and common stocks, and that which may influence the preference of the investor, is that preferred stock holders always take priority when dividends are paid out or when the company decides to liquidate its assets.
Preferred stocks are often cumulative, which means that any payouts that have been deferred due to financial difficulty accumulate and will be paid out one the company regains its financial strength. If this does not happen, then preferred shareholders are also given pay out priority once the company liquidates its assets.
Although preferred stocks may seem to provide greater benefits that common stocks, they may or may not bring with them the same voting rights as those belonging to certain common stocks. On the other hand, since preferred stockholders receive a fixed dividend, they are usually unable to take advantage of excellent profitability.
There are various types of preferred stock, such as preference preferred stocks, convertible preferred stocks, and participating preferred stocks, among others.