What is the primary purpose of a preferred stock?

The primary purpose of preferred stock is to provide priority for dividend payments. Preferred stockholders typically receive dividends before common stockholders, making these shares appealing for investors seeking a more stable income source. This preference in dividend payment means that in the event of a company's financial difficulties or liquidation, preferred shareholders are prioritized over common shareholders when dividends are distributed. Preferred stock often has fixed dividend payments, providing a predictable income stream, which can be particularly attractive in a low-interest-rate environment or for income-focused investors.

While preferred stockholders generally do not have voting rights, unlike common stockholders, this lack of voting ability does not detract from the security and priority of dividend payments they receive. Additionally, while capital appreciation can occur with preferred stocks, it is not their primary function, as they are typically more focused on providing steady income rather than significant growth potential. Lastly, preferred stocks are not risk-free investments; they carry risks like any other equity, including market risks and the company’s financial health, which can affect dividend payments and the stock's value.