rarely issued type of preferred stock. In addition to receiving the regular specified dividend, preferred stockholders will "participate" with common stockholders in any extra dividends paid. There are two types of participating preferred stock, partially participating and fully participating. If partially participating, preferred stockholders participate above the preferential rate on a pro rata basis with common stockholders, but only up to an additional rate specified on the stock certificate. For instance, on a 7% preferred stock issue, the allowed participation may be up to 10%. Thus the participating privilege is limited to an additional 3%. With fully participating preferred stock, preferred stockholders enjoy a preference for the current year at the preference rate (plus any cumulative preference) and they share on a pro rata basis in any dividends above the preference rate. For example, a 6% fully participating preferred stock receives its 6% preference rate plus a pro rata share based on the total par value of the common stock and preferred stock of excess dividends after common stockholders have received their matching 6% of par of the common stock.
preferred stock that, in addition to paying a stipulated dividend, gives the holder the right to participate with the common stockholder in additional distributions of earnings under specified conditions.
preferred stock that, in addition to paying a stipulated dividend, gives the holder the right to participate with the common stockholder in additional distributions of earnings under specified conditions. One example would be an arrangement whereby preferred shareholders are paid $5 per share, then common shareholders are paid $5 per share, and then preferred and common shareholders share equally in further dividends up to $1 per share in any one year.
Participating preferred issues are rare. They are used when special measures are necessary to attract investors. Most preferred stock is nonparticipating preferred stock, paying only the stipulated dividends.
