What characterizes preferred stock?

Preferred stock is primarily characterized by its claim on assets and dividends over common stock. Holders of preferred stock have priority when it comes to dividend payments, meaning they are entitled to receive dividends before any dividends are distributed to common stockholders. Additionally, in the event of a liquidation or bankruptcy, preferred stockholders have a higher claim on the company's assets than common stockholders, though they generally have lower priority than creditors.

Understanding this characteristic of preferred stock is crucial because it reflects the nature of its investment. Investors in preferred stock often seek a more stable income stream through dividends, knowing that they are prioritized in payout scenarios compared to common shareholders. This distinction influences investment strategies and the risk-return profile of different classes of stock.