Christian Farstad - Vancouver ScotiaMcleod

Let’s get right back to basics here.

Preferred shares represent ownership in a corporation similar to common shares. The preferred shares have a higher claim on assets and earnings than the common shares in the event of bankruptcy (hence the term ‘preferred’), but are subordinate to all outstanding debt obligations.

This means that the company bond holders get paid first in a bankruptcy, next in line are the preferred share holders and lastly, the common share holders.

Preferred shares are a ‘hybrid’ security as they have both equity (common share) and debt (bond) like features.

The equity-like features are that the preferred shareholder has an ownership stake in the company plus preferred shares trade on a stock exchange like common shares.

The debt-like features are the regular dividend payments and potential end date.

Normally the price of preferred shares has been less volatile than common stock due to their debt like features.

Preferred shares are more suited for investors looking for a steady stream of tax-efficient investment income rather than capital appreciation (growth).

There are many different types of preferred shares. For more information on types of preferred shares check out this blog.

For more comprehensive information on preferred shares download our FREE PREFERRED SHARE GUIDE or to sign up for my free weekly newsletter click here