2nd Nov 2009 by JonB
Preferred stock refers to an equitable share in a company that receives priority over the common stock. The holders of preferred stock are a higher priority when it comes to paying dividends. Each company is different, but preferred stocks usually pay dividends, and while common stocks may pay dividends as well, all the dividends of the preferred stocks must be paid before any dividend on the common stock is. If the company goes bankrupt, those holding preferred stock will have to all be paid before any one holding common stock.
Because preferred stocks usually pay dividends, their value doesn't fluctuate as much as that of the common stock. This can be a good thing as you can usually count on the dividend coming in, but if the company grows rapidly its likely the the value of the common stock will rise much faster than that of the preferred stock. Of course, the converse is also true.
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