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What Is Preferred Stock? A Plain-English Guide
The short answer
A preferred stock (or preferred share) is a security that pays a fixed, scheduled dividend and sits in between a company's bonds and its common stock. It trades on an exchange just like a stock — but it behaves far more like a bond.
Investors buy preferreds mainly for one reason: predictable income. You are not buying it to grow with the company. You are buying a stream of payments.
Where preferred stock sits in the capital structure
When a company runs into trouble, there is a strict pecking order for who gets paid. Preferred stock sits near the bottom — but crucially, above common stock:
- Secured debt — paid first
- Bonds and other unsecured debt (including baby bonds)
- Preferred stock — you are here
- Common stock — paid last, if anything is left
That single fact explains almost everything about how preferreds behave. You get paid before common shareholders, which makes your income more reliable. You get paid after every lender, which is why a preferred is riskier than the same company's bonds.
How the dividend works
A preferred is issued with a coupon — a fixed percentage of its par value. Par (also called the liquidation preference) is almost always $25 for exchange-traded preferreds.
So a 6.5% preferred with a $25 par pays:
6.5% × $25 = $1.625 per share, per year — usually paid in four quarterly installments of about $0.41.
That dollar amount is contractual and does not change (unless the issue is fixed-to-floating). What does change is the market price — and therefore the yield a new buyer receives.
The critical difference from a bond
Bond interest is a legal obligation. Miss it and the company is in default.
A preferred dividend is not. A company's board can vote to skip it. Nothing legally breaks. This is the single most important risk to understand, and it is why preferreds yield more than the same company's bonds.
What happens next depends on one word in the prospectus:
- Cumulative — the skipped dividends pile up and must be paid back before common shareholders receive a single cent.
- Non-cumulative — the skipped dividend is gone forever. (Common for bank preferreds.)
We cover this in depth in Cumulative vs non-cumulative preferred stock.
Price, par, and yield
Because the dividend is fixed in dollars, the price does the moving:
- Buy at $25 (par) and a 6.5% coupon yields you 6.5%.
- Buy at a $21 discount and that same $1.625 is a 7.7% yield.
- Buy at a $27 premium and it is only a 6.0% yield.
This is why preferreds trade like long-duration bonds: when interest rates rise, prices fall so that yields stay competitive. When rates fall, prices rise.
Most preferreds are perpetual — and callable
Unlike a bond, a typical preferred has no maturity date. It can theoretically pay forever. But it usually comes with a call date: a date after which the issuer can buy the shares back at par ($25), whether you want to sell or not.
That is a one-sided option — and it caps your upside. If rates fall and the preferred would otherwise rise to $30, the company simply calls it at $25 and reissues cheaper. See Callable preferred stock explained.
What to watch for
- Interest-rate risk — the biggest driver of price. Perpetual issues are very rate-sensitive.
- Credit risk — the issuer must stay healthy enough to keep paying.
- Call risk — paying well above $25 near a call date puts that premium at risk.
- Dividend suspension — legal, and permanent if the issue is non-cumulative.
- Liquidity — many preferreds trade thinly compared with common stock.
Key takeaways
- Preferred stock is equity that acts like a bond: fixed dividend, priority over common, junior to all debt.
- Par value is nearly always $25, and the dividend is a fixed percentage of it.
- A skipped preferred dividend is not a default — read whether it is cumulative.
- Most are perpetual and callable, which caps how far the price can rise.
You can browse every issue we track — with its coupon, par, call date and SEC-verified terms — in the preferred stock screener.
Frequently asked questions
This guide is for education only. Nothing here is investment, tax, or legal advice, or a recommendation to buy or sell any security. Figures on this site are drawn from SEC filings and live market data; always verify terms in the issuer's own prospectus before investing.