Simple English definitions for legal terms
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Noncumulative stock is a type of preferred stock that does not have to be paid dividends that are in arrears. Once a periodic dividend is omitted, it will not be paid. This is different from cumulative preferred stock, which must receive dividends in full before common shareholders may receive any dividend.
For example, if a company issues noncumulative preferred stock and decides not to pay a dividend for a certain period, the shareholders of this stock will not receive any payment for that period. However, if the company issues cumulative preferred stock and decides not to pay a dividend for a certain period, the shareholders of this stock will receive the unpaid dividend in the next period before any common shareholders receive any payment.
Understanding the difference between noncumulative and cumulative preferred stock is important for investors who want to make informed decisions about which type of stock to invest in.