Dividend Problems

• Preferred stocks pay dividends, but some pay non-cumulative dividends, which means that if the company chooses not to pay a dividend on that preferred stock, the dividends do not carry over to the next period. Investors have no recourse against the management, as the dividends are paid at the total discretion of the company.
  
  

No Voting Rights

• Preferred stockholders do not get any voting rights in corporate decisions like electing the board of directors, and other resolutions or actions that require a vote of the shareholders. These voting rights are reserved for common shareholders.
  
  

Capital Structure Rank

• Preferred stock holders rank below bondholders in the capital structure, so if the company were forced to liquidate or go into bankruptcy, the bondholders would see its claims paid before preferred stockholders. There may not be any cash left to pay preferred stockholders after bondholder claims are satisfied.
  
  

Non Participation

• Most preferred stock is non-participating, which means that holders are only due the rate of return or dividend that is specified when the stock was issued. Any profits of the company are distributed to common shareholders or retained by the corporation. Preferred stockholders do not benefit from the success of the company over the long term, and shareholders have no opportunity for capital gains no matter how well the company performs.
  
  

Liquidity

• Liquidity is a term used in the marketplace to describe how easy it is to buy or sell shares of a security. Most preferred stocks trade on an exchange but are less liquid, or harder to trade, than common stock because the issue sizes are smaller. Preferred stock also has more stable shareholder bases which hold for longer periods of time because preferred stock is purchased for income rather than the chance of a capital gain.
  
  

Redemption Problem

• Most preferred stock issues have features that allow the company issuing the stock to call or redeem the preferred stock at par value. Preferred stockholders could lose a high rate of return if the company redeems the preferred stock and an investor was unable to find another issue with a comparable yield.