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Series 7 Study Guide Lesson 3
This is the Series 7 Study Guide Lesson 3, in this episode were going to talk about preferred stock. This is a little different than common stock because it has a par value that actually means something. So preferred stock has a preference over common stock. Now there are a lot of different types of preferred stocks out there. There’s cumulative preferred, noncumulative preferred, convertible preferred and a few others but we’re not going to get into any more than that.
A preferred stock is issued with a par value. And the par value is the value of that stock in the event of a dissolution. Before the common stockholders get anything, preferred stockholders would get back 100% of this par value on that stock before the common stockholders would get anything. They may not get back 100%. They may get back whatever is left over after the creditors which are senior to the preferred stockholders get first. So it all depends on your hierarchy in the liquidation or dissolution of the company.
We’re going to get over some terms. We’ll just basically define some terms and talk about what those terms mean. When a preferred stock is issued it is considered a senior security over common. Debt is senior over preferred stock. The preferred stockholder stands above the common stockholder, but the debt holder stands above the preferred stockholder.
When a preferred stock is issued, it’s typically issued at let’s say $100 par value. If you look at a preferred stock sheet, it may say preferred stock $100 with 10 percent and that 10% is the dividend that is paid on a preferred stock. Let’s say a stock has a par value of a hundred dollars and a percentage interest rate or an interest rate of 10%, the holder of that preferred stock would expect to receive $10 per year. That’s the dividend rate on the preferred stock. Most dividends on preferred stocks are paid on a semiannual basis and remember in common stocks most dividends are paid on a quarterly basis. However, that’s not a hard and fast rule. Some preferred stocks only pay dividends annually. You need to look at the information for the specific preferred stock to determine how often it pays dividends. Also, some preferred stocks pay dividends on a quarterly basis. So there’s no hard and fast rule for when dividends are paid on preferred stocks.