Equity & Ownership

Preferred Stock

Understand preferred stock — the priority, protected ownership investors take — which trades some of common's upside for a liquidation preference and protective rights, making "owning equity" mean very different things depending on the class.

  • Beginner
  • 14 min total
  • 13 chapters

What decision this helps you make: What preferred stock gives (priority and protection) versus common — and why the class you hold determines your real position.

What this topic is

Preferred stock is a class of ownership that sits ahead of common — the equity investors typically take — trading some of common's upside for priority (a liquidation preference paying it back first) and protective rights.

Why it matters

It protects the investor's downside: in a modest sale, preferred recovers its money while common gets little or nothing. Two people can both "own equity," but preferred is protected, priority ownership and common is residual, last-in-line — very different positions.

Who should learn it

Anyone raising from or investing as a professional investor, or holding equity alongside preferred.

What you will understand

  • Understand preferred stock as priority, protected ownership
  • See its liquidation preference and protective rights
  • Know why it trades some upside for downside protection
  • See why common and preferred are very different positions

Prerequisites

Common misconception

"If two people both own equity in the same company, they hold the same thing." Not if one holds preferred and the other common. Preferred stock sits ahead of common: it's paid first in a sale (via a liquidation preference — its money back, sometimes a multiple, before common gets anything) and carries protective and control rights. So in a modest outcome, preferred recovers its money while common gets little or nothing. "Owning equity" means very different things depending on the class — protected, priority ownership vs. residual, last-in-line.