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Preferred stock has two main characteristics that distinguish it from common stock. First, if a company liquidates, any money that's left over for shareholders goes first to holders of preferred stock up to a set amount, and only if there's any remaining after that do common shareholders get anything. Second, preferred shareholders have preferential treatment with dividends, and if the issuing company doesn't pay the full amount of dividends set forth in the prospectus, then it can't pay common shareholders any dividend.
Preferred stock has a par value that the company assigns when issuing it. That value establishes the base on which dividend payments are calculated and often fixes the price at which the company has the right to redeem shares under set conditions. In some cases, preferred stock is created with a fixed final redemption date, while in others, preferred stock can be perpetual without any pre-set date on which the company will redeem the shares.
A hybrid security is a single financial security that combines two or more different financial instruments. Hybrid securities, often referred to as "hybrids," generally combine both debt and equity characteristics.
Definition: Preferred stock is referred to a hybrid security because it has similarities to both common stock and bonds. They have no fixed maturity date, if dividends aren't paid by the firm, it does not bring on bankruptcy, and dividends are not tax deductible. There is a similarity with bonds, in that their dividends have a fixed amount.
Five common investor types for startups include:
