What Is Par Value of Preferred Stock in Investing

The par value of preferred stock is a crucial concept to understand in investing. It's the minimum amount of money a company must raise when issuing new stock.

The par value of preferred stock is typically set by the company issuing the stock, and it can vary widely. In the US, for example, the par value of preferred stock is often set at $1,000 per share.

Preferred stockholders have a higher claim on assets and dividends than common stockholders, which can make it a more attractive investment option. However, the par value of preferred stock can also affect the company's financial statements and tax obligations.

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Preferred stock is a type of equity that represents ownership in a company, but it has some key differences from common stock.

Preferred stockholders are entitled to receive a fixed dividend payment, which can be a percentage of the par value of the stock, such as 8% of the par value.

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The dividend payment is usually made quarterly or annually, and it's considered a priority over common stock dividends.

Preferred stockholders also have a higher claim on assets in the event of liquidation, which means they'll receive their par value back before common stockholders.

In exchange for these privileges, preferred stockholders typically don't have voting rights, unlike common stockholders.

Preferred stock can be classified into different types, such as cumulative, non-cumulative, and participating, each with its own characteristics and benefits.

Non-cumulative preferred stock, for example, means that if a company misses a dividend payment, it won't accumulate and be paid later, unlike cumulative preferred stock.

The par value of preferred stock can be a complex topic, but let's break it down to the key features.

Par value is the minimum amount a company is required to pay for a share of preferred stock. This value is usually stated in the company's charter or articles of incorporation.

Preferred stock can have a par value that is higher than its issue price, which means the company can sell the stock for more than the par value. This is often the case when the company is trying to raise capital quickly.

The par value of preferred stock can also be used to calculate the company's dividend payments. For example, if a company has a par value of $100 per share and pays a 6% dividend, the dividend payment would be $6 per share.

Dividend payments on preferred stock are usually fixed and non-cumulative, meaning they don't accumulate if not paid in a given year. This is in contrast to common stock, where dividends can be cumulative.

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Callable preferred stock is a type of preferred stock that can be redeemed by the company at a predetermined price.

This feature allows companies to manage their capital structure and reduce their debt burden if needed.

For example, Microsoft redeemed its callable preferred stock at a price of $25 per share in 2011.

Callable preferred stock typically has a higher par value than non-callable preferred stock, such as the $100 par value of Microsoft's callable preferred stock.

Companies may call their callable preferred stock if interest rates fall, making the existing debt more expensive to maintain.

The call feature of callable preferred stock can also be used to retire existing debt and reduce the company's overall debt burden.