What Is a Preferred Stock Certificate?
A preferred stock certificate is a document that identifies the ownership share of an investor in a corporation.3 min read
A preferred stock certificate is a document that identifies the ownership share of an investor in a corporation.
What Is a Preferred Stock?
A preferred stock is a form of ownership in a corporation which yields higher earnings than common stock, and it also holds a higher claim on the corporation's assets. Shares of preferred stock do not generally carry with them voting rights.
Additionally, holders of preferred shares are usually given a dividend that is paid out first before any dividends that may be paid out to common shareholders. These dividends paid to holders of preferred stock are typically higher than those that are paid to shareholders of common stock. These dividends may be paid either monthly or quarterly. Preferred stock not only pays fixed dividends, but it also gives the owner some equity, as the preferred stock has the potential for price appreciation.
What Is a Stock Certificate?
A stock certificate is a generated document that makes known what an investor's ownership share is in a corporation. A stock certificate generally includes the following information:
- The number of shares
- Par value of the shares (if there is any par value)
- An identification number of the certificate
- The signatures of all authorized corporate executives
- The class of shares (whether they are preferred stock or common stock)
Stock certificates are hard to fraudulently replicate because they contain complex etchings and designs. The documents are generally kept away in storage and the electronic versions of the certificates are traded. For that reason, it is uncommon for investors in publicly held companies to actually view the underlying stock certificates.
There may be trading restrictions noted on either the face of the stock certificate or the back of the certificate. A shareholder may sell the stock certificate only if there is no restriction on the certificate stating that the certificate cannot be sold.
What Is the Difference Between Preferred Stock and Common Stock?
Common stock is—by law—prescribed, and every share of common stock brings with it one shareholder vote. In the event dividends are declared, shareholders of common stock are entitled to common stock dividends at a prorated share.
Under Delaware law, there is no set formula or prescription for preferred stock. The terms of preferred stock are open and are only limited by negotiations done by the Board of Directors. Preferred stock can either be voting stock or it may be non-voting stock. Depending on the goals of the company, preferred stock may be structured in order to offer the investors financial assurances without allowing the shareholders to have voting rights.
Preferred stock and common stock may be used by a company at the same time. Therefore, they are not mutually exclusive. A company may choose to use preferred stock along with common stock in order to preserve insider voting control while it is in working to raise investment capital, for example.
Standard Buyers of Preferred Stock
Preferred stock is available in a vast variety of different forms. A company has the ability to issue preferred shares under nearly any set of terms they come up with, as long as these terms are not contrary to laws or regulations. Most preferred issues do not have maturity dates, or if they do, the dates are quite far into the future.
The most common buyers of preferred shares are institutions, due to tax advantages that the institutions have available to them that are not also available to individual investors. As institutions typically make these purchases in bulk, preferred issues tend to be a simple way to raise significant amounts of capital. This is the reasoning behind the fact that private and pre-public companies tend to issue preferred stock.
The issuers of preferred stock have a tendency to group near both the lower and upper limits of the credit-worthiness spectrum. Some companies choose to issue preferred shares since certain regulations may prohibit them from incurring any additional debt, or these companies may decide to issue preferred shares to try and avoid being downgraded. Although preferred stock is considered equity, it is comparable in many ways to a bond issue. Some forms can act as a debt when considered from a tax perspective, such as a trust preferred stock.
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