Final answer:
Cumulative preferred stock ensures missed dividends are paid out to shareholders before any other stock dividends, while noncumulative preferred stock provides no such guarantee, meaning missed dividends are lost and not owed to shareholders in the future.
Step-by-step explanation:
The difference between cumulative and noncumulative preferred stock pertains to the payment of dividends. Cumulative preferred stock guarantees that if any dividends are missed, they are accumulated and must be paid out before any dividends are paid to common shareholders.
This means that if a company skips dividend payments, preferred shareholders are entitled to their missed payments before any future dividends are paid on any class of stock.
In contrast, noncumulative preferred stock does not have such a provision. If a company decides not to pay dividends in a given year, noncumulative preferred shareholders are not entitled