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What Is a Preferred Shareholder?

Gerelyn Terzo
Updated May 16, 2024
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A preferred shareholder is an investor who seeks to profit from an organization's decision to raise money by issuing equity shares. The preferred-stock investor may seek to gain exposure to a financial security that provides some stability through consistent dividend payments, which are distributed in a similar way to interest payments made on bonds, in addition to certain privileges reserved for stockholders. A preferred shareholder may tend to shun risk as preferred stocks do not usually experience the volatility that can occur in common stock investments, which are a more widespread type of equity shares.

The investor who becomes a preferred shareholder is protected somewhat from certain negative events. If the issuer of preferred equity shares becomes insolvent and files for bankruptcy protection, not all investors are entitled to any money regardless of the size of an allocation. A preferred shareholder receives some rights and may be paid after debt holders are compensated but prior to any distributions to common stockholders. The value of reimbursement for preferred stockholders is based on the amount the shares were worth at the offering.

Preferred shareholders become dividend recipients because of the features that are inherent in these shares. These investors become entitled to ongoing dividend payments made by the issuing company. The value of the dividend is typically a percentage of the value of the share of stock at the time of issuance.

Although dividend distributions are common for preferred shareholders, these payments are not guaranteed. In the event an issuing company's profitability slows, it may not be wise or possible for distributions to be made. Luckily, preferred shareholders are the last to receive any interruption in dividend payouts as the common stock dividend is usually the first to be halted. Depending on the type of preferred share selected, an investor may eventually become entitled to preferred stock dividends that ceased for a period of time. Companies make these payments to preferred stockholders at a more ideal time.

It is usual for the value of a preferred stock to fluctuate less than the types of price movements that occur in common shares of stock. The price of a preferred share remains somewhat steady, which provides stability that could be attractive to a preferred shareholder. Rewards are typically the reliable dividends that investors can expect as income. Unlike common shareholders, holders of preferred shares are not included in the vote for major corporate events, such as a merger deal.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
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Gerelyn Terzo
By Gerelyn Terzo
Gerelyn Terzo, a journalist with over 20 years of experience, brings her expertise to her writing. With a background in Mass Communication/Media Studies, she crafts compelling content for multiple publications, showcasing her deep understanding of various industries and her ability to effectively communicate complex topics to target audiences.
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Gerelyn Terzo
Gerelyn Terzo
Gerelyn Terzo, a journalist with over 20 years of experience, brings her expertise to her writing. With a background in...
Learn more
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