Cumulative Stocks - This type of preferred stock comes with a provision stipulating that if dividends have been skipped or omitted in the past, the holder will receive accumulated dividends in arrears. Furthermore, preferred stockholders will also receive dividend payouts before common shareholders. A cumulative preferred share can also be classified further by priority or preference, which will indicate its seniority over other preferred stocks and common shares during dividend payouts. If a dividend on a cumulative preferred is missed, it is not forgotten. Instead, it accumulates and must be paid off before any dividend payments are made to the common stockholders.
Non-Cumulative Stocks - All preferred shares that are not cumulative are called non-cumulative, or straight. In essence, holders of straight preferred stocks cannot expect to receive any payout for missed or omitted dividends.
Callable or Redeemable Stocks - As the name implies, this kind of preferred stock comes with a provision that gives the issuing company the right to call or redeem the share at a certain price, which will usually be higher than market value. Callable preferred stocks are not very popular with investors because of the risks that they carry. If prevailing interest rates are significantly lower due to financial conditions, calling such shares can lead to a lot of savings for the issuer, but huge losses for the investors.
Convertible Preferred Shares - This type of preferred stock can be exchanged or converted to a predetermined number of the issuer’s common shares after a specified date or period. After the set time, investors can decide when they want to make the conversion. However, convertible preferred stocks come with a provision allowing the issuer to force conversion. It is important to note that after the investors convert their preferred stock to common stock, the change is irreversible and an investor does not have an option to convert the common shares back to...
Please join StudyMode to read the full document