Preferred Stock

PREFERRED STOCK, stock of a corporation which pos sesses the same rights and privileges as common stock and which has in addition certain more or less valuable and desirable pref erences. Such stock may be preferred as to assets, or preferred as to dividends, or as to both. Being preferred as to assets means that in case of dissolution of the company, the holders of the stock will receive their portion of the proceeds before holders of other stock not preferred as to assets will participate. This preference is, of course, of no service to the stockholder as long as his company is prosperous and in no danger of dissolution, but in case of weak companies the preference tends to give his stock a higher market value than stock not so preferred. And in case of actual dissolu tion where the assets are not sufficient to satisfy all claims, the preference will prove most valuable.

The expression

preferred as to dividends means that this stock is entitled to a specified rate of dividend out of the earnings be fore any dividend is given to the stock not so preferred. It does not mean that a certain dividend is guaranteed but merely that if any amount of the earnings is declared as a dividend, then the amount necessary to pay the specified rate of dividend on the pre ferred stock, or such part of such dividend as possible, must be used for this purpose before any is allocated to pay a dividend on non-preferred stock. If the entire amount declared as a dividend is absorbed by the dividend on the preferred stock, it means simply that the non-preferred or common stock gets nothing. In prosper

ous companies, however, it is usually possible to pay the stipulated rate to the preferred stock and still have sufficient money left to pay an equal or even larger rate to the common stock. It is ordinarily only fair that the common stock should get more in view of the fact that it takes a risk by permitting the preferred stock to take out its share of dividend first. It is sometimes deemed advisable to have several issues of preferred stock, one taking precedence over the next, just as ordinary preferred stock takes precedence over common. These several issues are then usually classified as 1st preferred, 2nd preferred, etc. ; or some times as preferred A, preferred B, preferred C.

Preferred stock is also sometimes made participating. Partici pating preferred stock is that which is to receive first its pref erential dividend at the stipulated rate and after that is to participate or share with the other stock in the remainder of the funds declared as dividend. This participation or sharing may be done in one of a number of ways, but regardless of the manner of participation, if the preferred stock shares in any way in the dividend over and above its stipulated rate it is participating stock. Dividends on preferred stock may be either cumulative or non-cumulative. (J. H. B.)