Participating Preferred Stock

DEFINITION of 'Participating Preferred Stock'

A type of preferred stock that gives the holder the right to receive dividends equal to the normally specified rate that preferred dividends receive as well as an additional dividend based on some predetermined condition.

The additional dividend paid to preferred shareholders is commonly structured to be paid only if the amount of dividends that common shareholders receive exceeds a specified per-share amount.

Furthermore, in the event of liquidation, participating preferred shareholders can also have the right to receive the stock's purchasing price back as well as a pro-rata share of any remaining proceeds that the common shareholders receive.

BREAKING DOWN 'Participating Preferred Stock'

For example, suppose Company A issues participating preferred shares with a dividend rate of $1 per share. The preferred shares also carry a clause on extra dividends for participating preferred stock, which is triggered whenever the dividend for common shares exceeds that of the preferred shares.

If, during its current quarter, Company A announces that it will release a dividend of $1.05 per share for its common shares, the participating preferred shareholders will receive a total dividend of $1.05 per share ($1.00 + 0.05) as well.

Participating preferred stock is rarely issued, but one way in which it is used is as a poison pill. In this case, current shareholders are issued stock that gives them the right to new common shares at a bargain price in the event of an unwanted takeover bid.

RELATED TERMS
  1. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  2. Participating Convertible Preferred ...

    An equity holding that gives investors the right to claim excess ...
  3. Convertible Preferred Stock

    Preferred stock that includes an option for the holder to convert ...
  4. Lady Macbeth Strategy

    A corporate-takeover strategy with which a third party poses ...
  5. Poison Pill

    A strategy used by corporations to discourage hostile takeovers. ...
  6. Prior Preferred Stock

    A type of preferred stock with a higher claim on assets and dividends ...
Related Articles
  1. Fundamental Analysis

    Mergers And Acquisitions: Understanding Takeovers

    In the dramatic world of M&As, battleground terms meld with bizarre metaphors to form the language of the game.
  2. Investing Basics

    Stock Basics Tutorial

    If you're new to the stock market and want the basics, this is the tutorial for you!
  3. Bonds & Fixed Income

    A Primer On Preferred Stocks

    Offering both income and relative security, these uncommon shares may work for you.
  4. Investing Basics

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  5. Investing Basics

    Inside IPO Roadshows

    Understand more about IPO road shows. Learn the reasons why an IPO road show is important for the success of a company's public offering.
  6. Investing

    Where to Ride Out the Volatility

    The one word that characterizes financial markets today: volatile. Take a look at these three considerations.
  7. Term

    The Advantages of Preferred Dividends

    Preferred dividends are cash distributions a company pays on its preferred shares.
  8. Term

    The Pros and Cons of Sell-Offs

    A sell-off is the rapid sale of a security that’s followed by a drastic decline in its value.
  9. Mutual Funds & ETFs

    Preferred Stock ETFs Vs Bond ETFs

    If you’re weighing an investment in a preferred stock exchange-traded fund versus a bond ETF, there are two factors you should consider most.
  10. Investing Basics

    Explaining Wedding Warrants

    A wedding warrant is a warrant that can only be exercised if the host asset, usually a bond or preferred stock, is surrendered.
RELATED FAQS
  1. What is the difference between preferred stock and common stock?

    Preferred and common stocks are different in two key aspects. First, preferred stockholders have a greater claim to a company's ... Read Full Answer >>
  2. Does issuing preferred shares offer a tax advantage for corporations?

    There is no direct tax advantage to the issuing of preferred shares when compared to other forms of financing such as common ... Read Full Answer >>
  3. What are ComputerShare's escheatment services?

    Escheatment is the process by which ownership of abandoned property is transferred to the state. Escheated property can include ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. How many votes am I entitled to, if I own ordinary shares of a company?

    If an investor owns one ordinary share of a company, that investor is entitled to one vote on all of that company's major ... Read Full Answer >>
Hot Definitions
  1. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  2. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  3. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  4. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  5. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
Trading Center