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What Is Senior Preferred Stock?

What Is Senior Preferred Stock? thumbnail
Senior preferred shares are hybrid securities.

Senior preferred shares are hybrid securities that take upon characteristics of common stocks and bonds. Preferred shares are a staple of corporate finance designed to satisfy the investment needs of conservative savers, while affording management higher levels of control relative to common stock.

  1. Function

    • Corporations exchange senior preferred shares with investors for capital. The corporation then pays dividends upon these shares to investors.

    Benefits

    • Preferred stockholders carry rights related to dividend payments and asset claims that are senior, or prioritized above those of common shareholders.

    Considerations

    • The corporation favors issuing preferred shares because it is not legally bound to make payments---as is the case with bonds.

    Misconceptions

    • Senior preferred shares usually pay fixed dividends and do not offer the same potential for profits as common stock. Further, preferred shareholders are not allowed the same voting privileges that are related to common stockholders.

    Risks

    • Senior preferred stock prices decrease in value when interest rates upon bonds increase. Higher interest rates upon newer bonds make them better for fixed income than preferred shares paying regular dividends. Additionally, bondholders carry asset claims that supersede preferred shareholders in the event of bankruptcy.

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