Perpetual Vs. Nonperpetual Preferred Stock
Corporations issue two kinds of stock: common and preferred shares. Although common shares are relatively uniform, preferred shares are offered as two general types -- perpetual and non-perpetual. While some preferred shares can exist indefinitely unless the corporation exercises its call option (perpetual), others have a certain maturity date (non-perpetual).
Common Shares of Stock
Most of the shares you see traded in the stock market are common shares. Such shares entitle you to own a slice of the issuing firm and its future profit distributions. All corporations have common stock since all corporations must have owners. If the firm is ever dissolved as a result of bankruptcy or voluntarily, the shareholders receive what is left of the firm's assets after all creditors are paid in full.
Common shares also give the holder a say in how the firm is run. While shareholders cannot make day-to-day decisions, they get together once a year and elect board members, thereby determining the long-term strategic path of the company.
Preferred Shares of Stock
Preferred shares, on the other hand, are less widespread than common stock and entitle the holder to a specific annual payment as opposed to a portion of the firm's profits. In fact, the vast majority of firms do not have preferred stock. A preferred share may pay $10 per share, for example, and the holder is entitled to this payment regardless of the firm's profitability.
The preferred shareholders cannot sue the firm if their payments are suspended, which can occur by way of the board of director's order. However, the common shareholders cannot legally receive money until preferred shareholders are paid in full. In case of the firm's dissolution, too, the preferred stockholders must be fully paid before common shareholders can receive any money.
Preferred Stock With Expiration
A perpetual preferred stock is one that does not have a specific or flexible expiration date. Such a stock entitles you to receive dividends for as long as the issuing company is in business.
A non-perpetual stock can have either a specific expiration date or a recall clause. If there is an expiration date, you submit the preferred stock to the issuing firm on or after this date and receive the original issue price, printed on the stock certificate or found in the original issue declaration, known as the stock prospectus. After this date, the stock will cease to exist.
Recallable Preferred Stock
A preferred stock that has a recall provision is also non-perpetual. The prospectuses of such stocks give the issuing company the right, but not the obligation, to recall the shares after a specific amount of time has passed following issuance.
A prospectus may specify, for example, that the issuing firm can offer $105 per share for each preferred stock originally issued for $100 and recall the stock provided that at least five years have passed after issuance. Recalls usually occur at a price above the original issue price to compensate investors. If you receive such a notice, you must submit the stock and receive your recall payment, since the stock will legally cease to exist thereafter.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.