Preferred Shares

Ask a lawyer where preferred stock sits in a company's capital structure and the honest answer is "it depends on the term sheet," but the useful mental model is: above common equity, below debt. A preferred shareholder gets paid a set dividend before common shareholders see a dime, and gets first claim on assets ahead of common in a liquidation — but behind every bondholder and lender, and unlike a bond, missing a preferred dividend does not put the company into default.

The dividend is usually a fixed percentage of the preferred's par value, stated up front: "6% preferred" on $100 par pays $6 a year, however the stock trades. That fixed-payment structure means preferred stock prices like a bond, moving inversely with interest rates, far more than it prices like a growth stock.

$$P_{\text{preferred}} = \frac{D}{r_p}$$

the same growing-perpetuity idea as the dividend discount model with growth set to zero, since preferred dividends are typically flat rather than growing. $r_p$ is the market's required yield on this preferred, which moves with credit risk and interest rates, not with the issuer's earnings growth.

A worked example

A $100 par, 6% cumulative preferred pays $6 a year. Comparable-risk preferreds now yield 7.5% given where rates have moved, so this stock's fair price adjusts to keep the same effective yield: $P = 6 / 0.075 = 80.00$, i.e. $80.00 — it trades below par purely because the fixed $6 coupon is now less attractive than what the market demands.

Cumulative preferred (the common structure) means any skipped dividend accrues and must be paid in full before common gets anything — a company that suspends its preferred dividend for two years owes $12 in arrears before a single common dividend can be declared. Non-cumulative preferred has no such memory; a missed payment is simply gone.