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Simple English definitions for legal terms
callable preferred stock
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A quick definition of callable preferred stock:
Callable preferred stock is a type of stock that a company can buy back from its shareholders at a set price. This means that the company has the option to repurchase the stock if they choose to do so. Preferred stockholders usually have priority over common stockholders when it comes to receiving dividends and assets in the event of liquidation, but they may not have voting rights.A more thorough explanation:
Callable preferred stock is a type of stock that a company can buy back from shareholders at a predetermined price. This price is usually slightly above the stock's par value. Preferred stockholders receive dividends before common stockholders, but they usually do not have voting rights.
For example, if a company issues callable preferred stock with a par value of $100 and a callable price of $105, the company can buy back the stock from shareholders for $105 per share. This is beneficial for the company if interest rates decrease, as they can issue new stock at a lower rate and buy back the callable preferred stock at a lower price.
Another example is if a company issues callable preferred stock with a dividend rate of 5%. If the company decides to call the stock, they will no longer have to pay the 5% dividend rate to the preferred stockholders.
Callable preferred stock is a way for companies to have more control over their finances and make changes to their capital structure. It is important for investors to be aware of the callable feature when investing in preferred stock.