 In this presentation, we will take a look at the concept of preferred stock for a corporation. The concept of a preferred stock can really kind of muddy the water for the understanding of a corporate stock, corporate ownership, and the idea of the equity section for a corporation. When we take a look at preferred stock, we want to think about the things that will be related to the preferred stock and the common stock, how the preferred stock differs from the common stock, but first we want to just lay the groundwork about the basics of the corporation and then see how the preferred stock will differ to it. First off, just note that the preferred stock does not necessarily mean that it's preferred in all ways to the common stock. The common stock is the normal kind of form of ownership you see in a corporation. Also note that preferred stock may not be present in many types of corporations. When you form the corporation, typically it's formed with the common stock, that being the normal kind of form of ownership, the form of ownership where the stockholders have the ability to influence the corporation through voting with the common stock shares. So just remember, when you think of just normal circumstances for a corporation, the equity section is going to be broken out for a corporation in two components. It's going to be similar to the equity section for any other type of organization, such as a sole proprietorship or a partnership. The equity section for a sole proprietor or partnership being broken out by capital accounts listing who is owed to. The corporation typically is broken out not by who it is owed to because it's all the same. It's just however many shares someone owns, all those shares are the same. That typically being the common stock shares all being the same. And we represent the purchase of those in terms of the common stock and additional paid in capital and then the amount of accumulated earnings in terms of the retained earnings. Now the preferred stock is going to be a separate class of stock usually having priority for we have the dividend distribution and the distribution in liquidation. And that's where the preferred takes place. Note that it's not preferred in some ways because the preferred stock doesn't have the voting capacity of the common stock shareholders. So it's not like they have the influence when we are deciding to buy common stock or preferred stock. If we want to have the influence in the company then we typically want to have the common stock because that's going to give us that voting right for the influence within the company. Also as a company does well over time typically the common stock will do better off. Basically investing in a more long term perspective. Why is the preferred stock called preferred then because they're going to get priorities more like an investment. So it's kind of like hedging your bets in case something goes wrong. In other words a preferred stock and typically in the problems we'll see this and this will be a typical kind of book problem we'll have to deal with will be when there's a dividend distribution the preferred stock holders will get paid first. So they have priority so now that's not the best thing in all circumstances because they only get paid up to a certain amount. So in other words if the stock dividend that's being declared is very high then the common stock holders may benefit more than the preferred stock holders. However if the declaration of the dividends are fairly low then the preferred stock holders are going to get paid first and the common stock holders may get nothing. So and they also get the distribution they're going to get the same kind of advantage. So if you have the preferred stock and we liquidate the company and the company goes out of business then the preferred stock holders get paid first before the distribution to the common stock holders. So you can see that the preferred stock is kind of hedging your bets against a problem that is happening rather than betting really on long term growth. If there's long term growth then you don't want your preferred dividend to be limited. You want to have increased dividends as the growth increases and if the business stays in business then you might want to be on the common stock if it's continuing to grow if it goes out of business then you clearly want to get your money first and the preferred stock would do that. So that means that the preferred stock typically will have a stated dividend rate that they're going to use in order to calculate what the dividend will be and they typically have no voting rights. So note that unlike what we think of as normal stocks the preferred stock isn't going to be influencing the who's going to be on the board of directors and what not and therefore have to direct influence in terms or not direct but some type of influence indirect the voting influence on what happens in terms of the decision making for management. Note that none of the owners have direct influence typically because we're going to vote for the board of directors. Board of directors then hires the management typically is kind of the idea we think about but there we don't even have that voting power for the preferred stock as we do with the common stock. So dividends in arrears must be paid before common stock dividends. So this is really where the problem book problems often come into play and that is that you know if we don't pay the preferred stock then we typically have to accumulate the amount of preferred stock that wasn't paid. In other words the corporation has the ability to not declare dividends and that's okay if they don't declare dividends they don't have to pay the preferred stockholders and the common stockholders don't get anything as well. But if they do declare a dividend they have to not only pay the preferred stockholders for that year's dividends according to the calculation for preferred stock but also any dividends that they had not yet paid in prior years that's called dividend in arrears. So before the common stockholders get anything in other words they've got to pay off not only the preferred stockholder current dividend amount but any dividend amounts that had accumulated in prior years.