Definition of Preferred Stocks and Their Characteristics

Definition: Preferred stocks are hybrid financial securities that combine characteristics of both stocks and bonds, granting holders special financial rights compared to common stockholders. Companies issue them to raise capital while providing investors with relatively fixed and guaranteed returns. They feature priority in dividend distribution and assets during liquidation, but typically don't grant voting rights. They're considered medium-risk investments between common stocks and bonds.

Preferred stocks have diverse characteristics that make them attractive to different types of investors, with the most prominent being:

Dividend Priority: Distribution of fixed dividends before common stocks, usually at a predetermined rate of the par value.

Liquidation Priority: Recovery of stock value before common stockholders when the company is liquidated or goes bankrupt.

No Voting Rights: No voting rights in general meetings except in special cases such as delayed dividend distribution.

Callable Feature: May include the company's right to repurchase them at a specified price after a certain period.

Convertibility: Some are convertible to common stocks according to predetermined ratios and conditions.

Cumulative Dividends: Undistributed dividends accumulate and are paid later in cumulative types.

Relative Stability: Less volatile than common stocks but with limited returns and higher than bonds.

Types of Preferred Stocks

By Dividend Accumulation: Cumulative types retain unpaid dividends and accumulate them for following years, while non-cumulative types lose missed dividends permanently and cannot be recovered. Accumulated dividends are paid in full before distributing any dividends to common stocks.

By Conversion: Convertible types can be converted to common stocks at predetermined ratios and conditions, allowing benefit from company growth. Non-convertible types remain as preferred stocks with fixed returns throughout the investment period.

By Callable Feature: Callable types grant the company the right to repurchase them at a specified price (usually higher than par value) after a certain period. Non-callable types protect investors from early redemption and guarantee continued returns.

By Participation: Participating types receive additional dividends above the specified rate when the company achieves exceptional profits. Non-participating types are limited to the specified dividend rate only regardless of increased company profits.

By Return Rate: Fixed-rate types have a fixed dividend rate, variable-rate types are linked to market indicators like interest rates, and adjustable-rate types can have their rates adjusted based on company performance or market conditions.

Special Types: Optional types grant shareholders additional choices like payment method selection, and mandatory types convert compulsorily to common stocks when certain conditions are met, such as reaching a specified stock price level.

Rights and Benefits of Preferred Stockholders

Preferred stockholders enjoy special rights and advantages that distinguish them from common stockholders, providing greater protection and more stable returns, including:

Financial Rights: Dividend priority before common stocks, liquidation priority when the company dissolves, protection from dilution when issuing new shares, and the right to accumulated dividends.

Administrative Rights: Limited voting in special cases like delayed dividends, right to object to decisions affecting their rights, and representation on the board of directors in exceptional circumstances.

Investment Advantages: Return stability and regular dividends, relatively greater safety than common stocks, flexibility to convert to common stocks, and priority in capital recovery.

Legal Protection: Specific contractual rights defined in the prospectus, protection from manipulation and changing terms, right to resort to commercial courts when rights are violated, and compliance with Islamic Sharia provisions.

Sharia Controls: Compliance of profits with Islamic Sharia provisions, prohibition of usurious interest, and supervision by Sharia bodies over transactions.

Difference Between Preferred and Common Stocks

Preferred and common stocks differ in financial and administrative rights and benefits, where preferred stocks provide greater stability while common stocks grant broader control rights. These differences can be seen in the table below:

Comparison Aspect	Common Stocks	Preferred Stocks
Dividends	Variable based on performance	Fixed and guaranteed priority
Voting	Full voting rights	Limited or none
Risk	Higher risk	Lower risk
Returns	Unlimited and volatile	Limited and stable
Liquidation	After preferred and creditors	Priority in capital recovery
Growth	High growth potential	Limited growth
Control	Grant control rights	No control granted
Conversion	Not convertible	May be convertible
Callable Feature	Not callable	Callable
Liquidity	Higher liquidity	Lower liquidity

Issuance and Trading of Preferred Stocks

Issuance and trading of preferred stocks requires specific legal and regulatory procedures to ensure investor protection and market transparency, which include:

Issuance Process: Board of directors and general assembly decision, determining terms and benefits, preparing prospectus, and obtaining regulatory approvals.

Issuance Terms: Determining par value and dividend rate, conversion and callable conditions, voting rights, and maturity period.

Market Trading: Trading on licensed exchanges, through certified brokers, at prices determined by supply and demand, with complete pricing transparency.

Regulatory Requirements: Compliance with securities laws, periodic disclosure of financial performance, and obtaining necessary trading licenses.

Settlement Mechanisms: Electronic settlement through clearing systems, ownership transfer within a specified timeframe, and updating shareholder records.

Factors Affecting Trading: Company's financial performance, market rates, available liquidity, and company's credit rating.