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I'm confused about how common and preferred shares coexist.

Is a single preferred share always equal to the same amount of the company as a single common share, or does a preferred share somehow entitle the holder to more (or perhaps different parts?) of the company ?

Or is a preferred share just a common share that jumps the queue in the event of a liquidation?

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standard ratio of preferred shares to common shares in a company?

There is no standard ratio, a company may choose to issue preferred shares if it needs to raise capital fast and can't get more debt

preferred share just a common share that jumps the queue in the event of a liquidation?

Preferred shares have a guarantee of dividends, generally carry no voting rights and are higher in claims in the event of liquidation. Investopedia has a good description on this.

A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights.

Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price.

Edit:
The prospectus gives out the details. Generally Preferred stocks don't own the percentage of company in normal sense. These are more like Corporate Bonds in perpetuity; these can be called back and paid the value of purchase plus accrued interest [as laid out in prospectus] or can be converted into common stock [again laid out in prospectus]

  • Sorry but this didn't answer my question. It does not address how many common shares a preferred share would typically be worth? That is, does one preferred share and one common share represent the same piece of the overall pie ? – CodyBugstein Jun 26 '18 at 4:54
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    It does answer the question, in the very first sentence: “there is no standard ratio.” That is, it can be whatever the company chooses to issue and the market will bear. – prl Jun 26 '18 at 6:28
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Yes, a preferred share may entitle the holder to different parts of the company (see types below).

A Pfd stock is considered a hybrid security because it has similarities to both common stock and bonds. It is called "preferred" because it receives preferential dividend treatment. If the issuer doesn't pay the full amount of Pfd dividends in the prospectus, then it can't pay common shareholders any dividend. It also stands in front of owners of common stock in the event of liquidation though behind bondholders. This isn't likely to matter because in liquidation the odds are that everyone gets nothing.

Like common stock, Pfds represent an ownership stake in the company and therefore they are considered equity on the company's balance sheet. They trade on the stock exchanges but they do not have voting rights.

There are different types of Pfd stocks.

The most common type is a fixed rate cumulative redeemable Pfd stock.

Non cumulative are similar but the dividend is suspended, missed payment(s) do not have to be made up to the owner.

In a Trust Pfd, a company puts its bonds in a trust and creates Pfd shares from it. This accounting gimmick allows the company to deduct interest on the bonds while being treated as equity and making the company appear to have less debt.

Third Party Trust Pfds involve an an entity other than the issuer who buys company bonds and creates a Pfd stock from them.

Lastly, there are a few convertible Pfd stocks (U.S.) which have complicated rules laid out in the prospectus governing conversion into common shares. Prior to conversion, they do not benefit from any increase in common stock dividends but they provide the ability to participate in share price appreciation.

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    "Preferred shares do not have voting rights" - This is not true; it is actually relatively common [pun] for preferred shares prior to an IPO being put in place with high voting rights to maintain control even with < 50% ownership of the actual equity value of the company. More common still in private companies. – Grade 'Eh' Bacon Jun 26 '18 at 13:18
  • In the US, most preferred shares do not carry voting rights (see Dheer's link) or Google it. As for shares held before their IPO, that applies to retail investors here? Really? – Bob Baerker Jun 26 '18 at 13:37
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    The point is that voting rights are effectively unrelated to what makes a preferred share 'preferred'. In addition, yes, this is useful for a retail investor to know, because control by original owners (maintained by super-voting right preferred shares, or otherwise) has an impact on the value of other equity being purchased. A small caveat on your answer to change 'always' to 'usually' would help provide clarity in what is often an ill-defined area. – Grade 'Eh' Bacon Jun 26 '18 at 14:00
  • Again, more hair splitting. In the US, most preferred shares do not carry voting rights. Super-voting stock allows founders and company insiders to maintain control throughout the life of the company. It is a tiny subset of an already small subset and in all likelihood applies to no one asking questions here. – Bob Baerker Jun 27 '18 at 17:28
  • And most people who own shares never use them to vote, so I guess we should just ignore the fact that shares have voting rights, right? Your statement is simply wrong - being a preferred share is orthogonal to voting rights. – Grade 'Eh' Bacon Jun 27 '18 at 20:55

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