Preferred Stock
Stock that receives dividends first and in a set amount but usually has no voting rights — sitting between stock and bond in character.
In plain terms
There are two kinds of stock. The one we usually buy is common stock; preferred stock is the kind that "receives dividends first and in a set amount, but cannot take part in company votes."
Preferred stock has a relatively stable dividend, giving it a bond-like side, while still being stock — which is why it is called "between stock and bond." If the company fails, its order of getting money back also comes ahead of common stock (but behind bonds).
What it tells you
Preferred stock suits investors who want "stable dividends over growth." In return, even if the company grows greatly, it often does not enjoy that upside as much as common stock.
For the company, preferred stock is a way to raise funds without it being booked as debt (liabilities), so when reading the capital structure you check whether preferred stock exists.
Formula
preferred stock = "preferred" over common in dividends and liquidation, but usually no voting rights (common stock = has voting rights, dividends later, upside from growth)
What high or low means
If you want stable dividends, preferred stock suits; if you want the upside of company growth and voting rights, common stock suits (it is less which is better than that the purpose differs).
When rates rise, preferred stock paying a set dividend tends to lose appeal like a bond, and its price tends to get pressed down.
"Preferred is preferred over common, so it is better" is a misunderstanding. It only comes ahead in dividends and liquidation order; it has no voting rights and less upside from growth. The purpose differs — it is not a matter of superiority.
Preferred stock varies in its terms by type (dividend rate, whether convertible, whether redeemable). Even the same "preferred stock" requires checking the specific terms.
Korean and US preferred stock differ a bit in character. US preferred stock is often closer to a bond, so viewing it only by Korean standards can mislead.
In 2008, when even Goldman Sachs was shaken by the financial crisis, Warren Buffett invested $5 billion — not in common stock but in "preferred stock." The terms gave him a hefty fixed dividend of 10% a year, plus the right to later convert into common stock at a set price.
He cleverly used the fact that, when a company is precarious, preferred stock receives dividends first and in a set amount and comes ahead in liquidation order. Through this deal Buffett secured stable dividends and a large gain at once. It is a case that shows well why preferred stock is "between stock and bond."
Metrics to read alongside
See it in real stocks
Search US stocks on Stocklore to see Preferred and other financial metrics alongside the sector average.
This explanation is for information and reference only and is not a recommendation to buy or sell any security. Investment decisions and their consequences are your own.