PREFERREDS Meaning and
Definition
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Preferreds, short for preferred stocks, are a type of security or investment instrument that combines features of both common stocks and bonds. They are typically issued by corporations and are classified as equity securities. However, they possess certain characteristics similar to fixed-income investments, offering investors a fixed dividend payment.
Preferreds, unlike common stocks, generally do not grant ownership rights in the company. Instead, they provide shareholders with a preferred claim on the company's earnings and assets before common shareholders. This preferential treatment means that if the company goes bankrupt or liquidated, preferred shareholders have a higher likelihood of receiving their investment back compared to common shareholders.
One of the main defining features of preferreds is the fixed dividend payment they offer. These dividends are usually set at a fixed rate, stated as a percentage of the par value of the stock. This feature provides investors with a predictable income stream, similar to bond coupon payments.
Preferreds can be classified into different types based on specific terms and conditions. Some may have a callable feature, allowing the issuer to redeem the shares after a specified period. Others may be convertible into common stock, providing shareholders with the opportunity to convert their preferred shares into common shares at a specified ratio.
Investors often find preferreds appealing due to their potentially higher yields compared to common stocks and lower risk compared to bonds. Nonetheless, they still carry some level of risk associated with the financial health of the issuing company and the possibility of interest rate changes. Overall, preferreds represent a unique investment instrument that combines elements of equity and fixed-income securities, making them an option for income-seeking investors.
Etymology of PREFERREDS
The term "preferreds" is an abbreviation or colloquial way of referring to "preferred shares" or "preferred stock". Therefore, the etymology of the word originated from the combination of "preferred" and "shares" or "stock".
The word "preferred" in this context comes from the verb "prefer", which has its roots in Latin. "Preferre" is a combination of "pre-" (meaning "before" or "in front of") and "ferre" (meaning "to carry" or "to bear"). In English, "prefer" means to like, choose, or favor one thing over another.
When it comes to the financial world, "preferred shares" or "preferred stock" are a type of ownership investment that typically provides certain advantages or preferences over common shares or stock.
