Preference stock (or preference shares or preferred stock or preferred shares)

Preference stock (or preference shares or preferred stock or preferred shares) – A special equity security that has properties of both an equity (potential appreciation) and a debt instrument (fixed dividends)—a hybrid instrument. They provide a class of ownership in a corporation that has a higher claim on the assets (in the event of liquidation) and earnings than common stock, but are subordinate to bonds. Preference stock generally has a dividend that must be paid out before dividends to common shareholders and the shares usually do not have voting rights. Precise details about the structure of preference stock are specific to each company and are stated in a Certificate of Designation. Although they may be convertible into common stock, they are rated by credit rating companies, and are callable at the option of the corporation. Preference stocks offer the issuer an attractive alternative and cost-effective form of financing—e.g., a company can defer dividends by going into arrears without much of a penalty or risk to their credit rating; they are also useful as a means of preventing hostile takeovers.