A preferred security is a type of fixed-income securities with equity-like features mainly issued by large financial institutions such as banks, insurance firms, etc. For holders, preferred securities are a type of investment that usually offers higher yields than pure-debt fixed income securities, such as investment-grade corporate bonds, treasury securities, etc. Preferred securities are usually hybrid securities, with the characteristics of both equity and debt/ stocks and bonds.

However, not all preferred securities are hybrid, such as a specific type of preferred shares representing ownership in the issuer. Unlike an issuer’s common stock, preferred stock has a fixed principal/ par value. Dividends may not be announced and distributed as per management’s discretion and are generally not cumulative (i.e., dividends do not accumulate if deferred). As equity securities, the coupon payments of specific types of preferreds may enjoy special tax treatment.

The main types of preferred securities (preferreds) include:

• Preferred stocks (equity preferreds).
• Baby bonds.
• Senior notes.
• Hybrid preferred securities.