Glossary Term
Preferred Shares
Definition
Preferred shares, also known as preferred stock, are a type of equity security that provides shareholders with a higher claim on a company's assets and earnings than common shareholders. Preferred shareholders typically receive fixed dividends, which are paid out before any dividends to common shareholders. In the event of liquidation, preferred shareholders are also paid before common shareholders. However, preferred shares usually do not carry voting rights in the company unless certain conditions are met. Preferred shares are often issued as a way to raise capital while offering investors more security than common stock.
Relevance to the MedTech Industry
Preferred shares provide investors with a more stable and predictable income stream through fixed dividends while offering the issuing company the ability to raise capital without diluting common shareholders' control. Preferred shares strike a balance between the higher risk and return of common stock and the lower risk of debt instruments, providing an attractive investment option for those seeking steady income and relatively lower risk.
Additional Information & Related Terms
The Benefits of Preferred Shares
Fixed Dividend:
Preferred shares often offer fixed dividends, which are paid out regularly to shareholders. This provides a reliable income stream for investors, which is especially appealing in low-interest-rate environments.
Example: A company issues preferred shares that pay a 6% annual dividend, which is paid before any common shareholder dividends.
Priority in Liquidation:
In the event of liquidation, preferred shareholders have a higher claim on the company’s assets than common shareholders, though they still rank behind debt holders (such as bondholders).
Example: If a company goes bankrupt and liquidates its assets, preferred shareholders will receive their share of the proceeds before common shareholders.
Convertibility:
Some preferred shares are convertible into common shares at a predetermined ratio, allowing investors to benefit from the potential appreciation of the company's stock.
Example: A convertible preferred share may allow the holder to exchange one preferred share for two common shares, providing upside potential if the company's stock price increases.
Cumulative vs. Non-Cumulative Dividends:
Cumulative preferred shares entitle the holder to dividends that accumulate if not paid in any given year. Non-cumulative preferred shares do not have this feature.
Example: If a company fails to pay dividends on cumulative preferred shares for a year, those dividends must be paid in the future before any dividends are paid to common shareholders.
Callable Feature:
Some preferred shares may be callable, meaning the issuing company can redeem the shares at a set price after a certain period, often at a premium.
Example: A company issues callable preferred shares, which it can redeem after 5 years at a premium price of $105 per share, giving it flexibility in managing capital.
Related Terms
Common Shares: The standard equity ownership in a company, with voting rights but often no guaranteed dividends.
Convertible Preferred Shares: Preferred shares that can be converted into a specified number of common shares, often used in growth-stage or startup financing.
Dividend Yield: The annual dividend income expressed as a percentage of the stock price, which is a key factor in determining the attractiveness of preferred shares to investors.
Callable Preferred Shares: Preferred shares that can be redeemed by the issuer at a predetermined price before the maturity date, typically at a premium.
Cumulative Preferred Shares: Preferred shares where any missed dividend payments are carried forward and must be paid before dividends can be paid to common shareholders.