Partnership and Corporation Exam 2025 – 400 Free Practice Questions to Pass the Exam

Preferred shares are a class of ownership in a corporation that typically provide holders with certain advantages over common shareholders. One key feature is that preferred shares come with a prior claim on dividends. This means that preferred shareholders are entitled to receive dividends before any dividends are distributed to common shareholders. This feature makes preferred shares desirable for investors seeking stable income, as they are more likely to receive their dividends even in less favorable financial conditions for the corporation.

In contrast, common shares do not have this guaranteed priority regarding dividends, making the dividend payouts less certain for common shareholders. Preferred shares often represent a compromise between the stability associated with fixed income investments and the potential for capital appreciation found in common equity. Therefore, the correct answer emphasizes this fundamental aspect of preferred shares, highlighting their preferential status in terms of dividend distribution. This prioritization can enhance their appeal to investors focusing on income generation.