Series 6

• Cumulative preferred stock: If a corporation fails to pay the full dividend on its preferred stock, all preferred dividends are considered to be in arrears and must be paid to holders of cumulative preferred stock before common stockholders receive their dividends.

For example, if the preferred stock pays a 6% yield, but the company has only paid $2 per share for the past two years, it will owe shareholders a total of $14 in the third year:
That is, Year1 ($6 owed - $2 paid) + Year2 ($6 owed - $2 paid) + Year3 ($6).

• Convertible preferred stock: Convertible preferred stock can be exchanged for common stock at a specific price and at the discretion of the shareholder. When this occurs, the value of the common stock for which the preferred stock is exchanged is called the conversion price. If the par value of the preferred stock is $150 and the conversion price is $30, the conversion ratio is 5-to-1. That is, the preferred shareholder would receive five shares of common stock.

It is advantageous for the shareholder to convert to common stock above the conversion price. Note, though, that convertible preferred stock pays a lower dividend than other types of preferred stock because it has the convertible feature. Still, the convertible preferred shareholder has the advantage of receiving a higher dividend payment than common stock affords, while at the same time owning the ability to convert to common stock to take advantage of capital appreciation.

Make sure you can distinguish between conversion price and conversion ratio and you know how to calculate the conversion ratio! The conversion ratio equation is the same for convertible bonds and convertible stocks: Conversion ratio = Par Value Conversion price

For more information on the potential benefits of convertible preferred shares and determining the profits of converting and the conversion premium, refer to the article Introduction to Convertible Preferred Shares.

• Callable preferred stock: When a company issues callable preferred stock, it has the right to repurchase the stock, or call it, at a specific price in the future. This price, called the call price, is usually higher than the stock's par value, in order to give investors an incentive to buy the stock.
  
  
• Participating preferred stock: This type of preferred stock pays the holder a higher dividend above and beyond a certain level of its common dividend when a company has extremely good earnings in a given year. For example, a stock might normally pay a 4% preferred dividend, but it is participating up to 7%. In this instance, the shareholder would receive 4% until the common stock dividend reached a predetermined level, at which time the participating preferred stock dividend would be bumped up to 7% and split 50-50 with common shareholder dividends. This type of preferred stock is rarely issued.

1. Wages owed to employees
2. IRS (taxes)
3. Secured debt
4. Unsecured debt and general creditors
5. Subordinated debt
6. Preferred stockholders
7. Common stockholders