By Eric Reed
Shareholders who own preferred stock generally receive any payments made by the underlying company, such as dividends and liquidation, before most other shareholders. Depending on the nature of the stock they might also collect higher payments.
Shareholders who own participating preferred stock enjoy all the priority benefits of preferred stock. They also, however, receive additional priority when it comes to payments, even beyond non-participating preferred stock. They can receive additional dividend payments and have extra claims to a company’s assets if it is liquidated.
The name is simple: As a participating preferred shareholder you have the highest degree of preference and participation in the profits of the business. To understand how that works, we need to understand share classes.What Are Stock Classes?
When companies issue stocks they often do so in different classes. This is generally referred to as Class A shares, Class B Shares and so on. The letter classifications have no legal significance; a company can call its share classes by any name it chooses. Class A, B and C have simply become common use.
Stock classes represent different rights apportioned to the stockholders. The most common form is called “common stock.” Most shares issued by a company will be common stock; typically all or almost all of the shares a company releases during an IPO will meet this standard.
Common stock gives the shareholder no special rights. If the company issues a dividend, holders of common stock generally get paid last and receive the lowest per-share payment. The same holds true if the company is sold. During a liquidation, after everybody else gets paid the company will distribute whatever is left to the holders of common stock.
So, for example, a company could call its common stock “Class A shares.” This simply means that any time the company refers to Class A shares, it is referring to its common stock.
While common stock is what investors typically buy and trade on the stock market, companies will sometimes create additional privileges to reward more important investors. For example, investors who fund a company before it goes public might get shares like this. Most of the time, these shares are called “preferred” and “participating.”
So, for example, a company might have Class A, B and C shares of stock. Class A stock might be common stock, held by ordinary shareholders. Class B stock might be preferred stock, and Class C might be participating preferred stock.What Are The Rights of Participating Preferred Stock?
Preferred stock means that each share of this stock comes with additional rights above that of common stock. Most often this applies when it comes to collecting payments from the company; typically in two situations: dividends and liquidation.
Participating preferred stock is a form of preferred stock. It is unlikely that you will ever find participating common stock. Shareholders who hold participating preferred stock get additional priority when it comes to payments issued by the company above those granted to preferred stockholders. Participation typically comes in two forms:
So, for example, Grow Co. might issue three shares of stock: common stock, non-participating preferred and participating preferred. After three years in business, it issues a dividend. After five years, it winds down and liquidates. It might define those shares as follows:
However, you should understand that these definitions can change. Every company can define the rights and responsibilities of preferred and participating stock as it sees fit. These are simply the most common uses.The Bottom Line
They will receive more money than holders of common stock and will receive it first, meaning that they’re more likely to get paid when money is tight.Tips for Investing
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