Preferred Stock Key Terms

Invest right with knowledge of preferred stock key terms

By Shannon Tani

Preferred stocks are an attractive investment because they are a bit safer than common stock. However, before dipping your toe in these investment waters, you'll want to make sure that you understand what you're doing. When your purchase a preferred stock, you're likely to receive dividends, but you'll want to know if they are fixed or floating rate. Understanding the par value can help you make wise choices, as well as knowing whether your stock is participating or non-participating. Get started with these words.

Poison pill

The poison pill is a method that companies use to deter a hostile takeover. By deciding to issue preferred stock, the company becomes less attractive to an aggressor. The poison pill is not intended to affect the main company; only the company that is trying to take it over.
Try: Learn more about how a poison pill works at the American Law Encyclopedia.

Par value

A stock's par value is the lowest amount of money at which a company can sell a stock. Preferred stock is often sold at par value.
Try: Learn more about par value through wiseGEEK.

Fixed or floating rate dividends

Many preferred shares of stock pay out a fixed dividend on a quarterly basis. This means that the percentage stays the same. Some stocks, however, pay floating dividends, which means that the rate can change from quarter to quarter.
Try: Finpipe.com explains fixed and floating rate dividends under the "preferred stock" section.

Common stock

Common stock are regular shares of stock in a company. The advantage of common shares is that shareholders can have voting privileges, however preferred stock holders are paid first.
Try: AssetPlay.net describes common stock.

Callable stock

When a stock is callable, it means that the corporation is able to call it back, paying a previously agreed upon percentage. It is a way for companies to get out of the preferred stock programs and a way to limit a preferred stock's value.
Try: Learn more about callable stock from AccountingCoach.

Participating and non-participating preferred stock

Participating and non-participating preferred stock refers to the way that preferred stocks are liquidated in the case of a sale. Participating preferred stock allows the holder to receive the investment, dividend and interest rate and have a share in other proceeds. Non-participating preferred stocks do not receive a share in other proceeds, but may opt to convert to common stock.
Try: Startup Company Lawyer explains the difference between participating and non-participating preferred stock.