A preferred share is a kind of share that has both bond and equity-like qualities. It pays a fixed dividend for a set period, like a bond, but can also be traded on an exchange, similar to a stock.
What that means:
When public companies need more capital than their cash flow can provide, they typically have two choices: they can borrow money, either from banks or by issuing corporate bonds, or they can sell more stock. Companies that need a lot of capital, such as utilities, telecoms, banks and insurance companies, sometimes opt for a third way: by issuing preferred shares. It’s a kind of equity that comes with a defined dividend. The value of the shares is based on their income stream rather than the company’s fortunes (such as earnings or profits), which means their price doesn’t rise and fall in the same way common shares might. They’re called preferred because the company will either cut or eliminate its common-share dividend before it breaks its commitment to its preferred shareholders. Unlike with common shares, you won’t get a vote at the annual meeting, but in some cases, you can convert these shares to regular stock. If the business goes bankrupt, you’ll get paid out after bondholders and other creditors but before common shareholders. People like these shares because they tend to have higher yields than investment-quality corporate bonds and they’re taxed at a better rate than the interest paid on bonds.
Preferred shares can provide a stable income stream and help to diversify a portfolio.