What are preferred stocks?

Preferred stocks represent a class of ownership in a company that grants shareholders a higher claim on the company’s assets, especially in the event of liquidation, compared to common stockholders. This means if a company goes bankrupt and its assets need to be liquidated, preferred shareholders are paid out before common shareholders. This higher claim on assets is a critical feature that appeals to investors seeking a more secure investment compared to common stock.

In addition to their priority in asset claims, preferred stocks often come with fixed dividend payments, making them similar to debt instruments in some respects, but they do not provide voting rights as common shares do. The ability to receive dividends before common stockholders adds an element of financial security, which is why many consider preferred stocks to be a hybrid investment option, combining characteristics of both equity and fixed income.