What is Callable Preferred Stock?

Callable Preferred Stock, also referred to as re-purchasable preferred shares, or redeemable stock or is a type of preferred stock that can be redeemed or repurchased by the issuing company. The issuing company can repurchase the shares at a specified price for a defined period after the issuing of the stock or in the event of occurrence of a particular condition.

How Does Callable Preferred Stock Work?

Callable or redeemable stock are mostly issued by the companies in the in the developed countries such as the United Kingdom, united states among others. The main feature of this kind of stock is that the company issuing shares has the right to buy back its shares at a given price after some durations based on the agreed conditions. However, besides most preferred stock being redeemable, the redemption of most classes of the preferred stock is based on the stock redemption clause that set the minimum period, the redemption method, the redemption price, and the purpose of the redemption. Redemption of stock occurs in three main ways:

• Premium redemption: under premium redemption, the compensation amount is added to the par value of the preferred shares for redemption.
• Fund compensation: under this method, the issuing company sets the compensation amount from operations or dividends to pay for the redeemed shares.
• Conversion redemption: under this method, the issuing company converts preferred shares to ordinary shares.

Similarly, there are two types of redeemable priority shares which are mandatory and arbitrary redemption.

• Mandatory redemption occurs when the issuing company has the obligation to repurchase shares from the shareholders. The shareholders also have the obligation to sell the shares back to the company
• Arbitrary redemption this occurs when the shareholder has an option to decide whether to sell back the shares to the company or not based on the agreement by the issuing company.

In most cases, the redeemable shares fall in the first category. This means that the redemption choice lies in the hand of the redeeming company.