Participating preferred stock
What is participating preferred stock?
It's a type of stock with certain privileges. When dividends are paid, non-participating shareholders come first, then participating preferred shareholders, then common shareholders. It's the same order of preference when a company is liquidated, except that debts must be paid before any shareholders benefit.
Where have you heard about participating preferred stock?
Whenever a company pays dividends, needs to be liquidated or seeks early investments. Because investing early is a risk, many investors want preferred stocks offering higher exit payments on liquidation. But it's no guarantee against loss because debts are paid first, whatever happens.
What you need to know about participating preferred stock.
A company must pay dividends to preferred shareholders before anyone else. But unlike common shareholders, when preferred investors get paid, they receive their initial investment back, plus any dividends owed. The difference between non-participating and participating preferred stock is that participating preferred stockholders 'convert' their shares into common stock when remaining assets are dished out during liquidation. Investors prefer participating preferential stock over common stock because they receive a preferential return over both low and high exit transaction values.