You may have heard mention of preferred shareholders or preferred stocks in investment circles. And you might have wondered: How do I get preferred stocks? Preferred stocks are available to individual investors, but there is type of preferred stocks that may be out of reach to most: Participating preferred stocks.
Here’s a look at participating preferred stock, when one might have the option to own participating preferred stock, and the benefits of participating preferred stock.
What is Preferred Stock?
Preferred stock shares characteristics of both common stocks and bonds. Preferred stocks allow investors to own shares in a given company and also receive a set schedule of dividends (much like bond interest payments). Because the payout is predictable and expected, there isn’t the same potential for price fluctuations as with common stocks—and thus there’s less potential for volatility. But, the shares may rise in value over time.
How Preferred Stocks Work
Shares of preferred stock tend to pay a fixed rate of dividend. Preferred stocks have dividend preference; they’re paid to shareholders before dividends are paid out to common shareholders.
These dividends may or may not be cumulative. If they are, all unpaid preferred stock dividends must be paid out prior to common stock shareholders receiving a dividend.
For example, if a company has not made dividend payments to cumulative preferred stock shareholders for the previous two years, they must make two years’ worth of back payments and the current year’s dividend payments to preferred shareholders before common stock shareholders are paid any dividend at all.
Because of the fixed nature of the dividend, the investments themselves tend to behave more like a bond. When an investment pays a fixed and predictable rate of interest, they tend to trade in a smaller and more predictable bandwidth. Compare that to stocks, whose future income stream and total return on investment are less predictable, which lends itself to plenty of price disagreement in the short-term.
Preferred stockholders do not typically enjoy voting rights at shareholder meetings. But, preferred stock shareholders are paid out before common shareholders in a liquidity event.
Participating Preferred Stocks
Participating preferred stock takes on all of the above features, but they may receive some bonus benefits, such as an additional dividend payment. This additional payment may be triggered when certain conditions are met, often involving the common stock. For example, an additional dividend may be paid out in the event that the dividend paid to common shareholders exceeds a certain level.
Upon liquidation, participating preferred shareholders may receive additional benefits, usually in excess of what was initially stated.
For example, they may have the right to receive back the value of the stock’s purchasing price. Or, participating preferred shareholders may have access to some pro-rata cut of the liquidation proceeds that would otherwise go to common stock shareholders.
Nonparticipating preferred stocks do not get additional consideration for dividends or during a liquidation event.
For those with access, participating preferred stock is an enticing investment. That said, the average individual investor may not have the chance to invest in participating preferred stock. This type of stock is typically offered as an incentive for private equity investors or venture capital firms to invest in private companies.
Preferred stock offers some benefits that common stock does not—such as a regular dividend schedule and the potential to increase in value without threat of volatility. Participating preferred stock offers investors even more potential benefits, including additional dividends and the opportunity to participate in liquidity events. However, participating preferred stocks are generally an option only for private equity investors or venture capitalists.
Though an investor might not have the chance to get involved with this particular investment opportunity, there are other ways to trade stocks online and invest in the market. SoFi Invest® offers both active investing and automated investing options to suit every type of investor.
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.