Final answer:
Cumulative preferred stock ensures that holders are paid missed and current year dividends before common shareholders.
This type of stock offers investors a more secure position in profiting from the company's earnings. Management and the board decide on issuing stock and paying dividends, with influences varying between public and private companies.
Step-by-step explanation:
The type of preferred stock mentioned in the question refers to cumulative preferred stock.
Holders of cumulative preferred stock have the right to receive dividends in arrears before any dividends can be declared on common stock.
This means that if the company does not pay dividends in any year, those dividends are accumulated and must be paid out to cumulative preferred shareholders before any dividends can be paid to common stockholders. Additionally, these shareholders are also entitled to their current year's dividends.
It's a mechanism that offers an extra layer of security for the investors of the preferred shares, ensuring they receive a certain percentage of the profits.
Decisions on when and whether a firm will issue stock, pay dividends, or re-invest profits are made by the firm's management and board of directors.
In publicly-traded companies, these decisions are influenced by shareholder votes to some extent, while in private companies, the decisions are taken by private owners or a board appointed by them.
In all cases, the policies on dividend payouts for preferred and common stock are guided by the company's wish to attract investors and the need to maintain a balance between rewarding shareholders and supporting the firm's growth.