Economic-Jurisprudence Based Analysis of Preferred Stock

Capital markets are recognized as bridges between investor and investee. The mechanisms applied in these markets accelerate the economic development by the growing volume of savings and investment. In this market, financing a major part of the costs of firms should be possible by the existing instruments. Preferred shares or preferred stocks is a type of stock which may have any combination of features not possessed by common stock including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument. Preferred stock is considered to be a hybrid security, having some of the characteristics of common stock but also resembling fixed income offerings in many respects. Unlike common stocks, preferred stocks tend to stay relatively stable in price after their issuance. They behave more like bonds than stocks in a number of ways, as they pay regular dividends at either a set or variable rate of interest, and their prices fluctuate in the secondary market in accordance with interest rates. Similar to an equity security, a preferred share represents an ownership interest. Preferred stocks are favored by those investors who seek fixed regular income and a reasonable safety of their capital. Using an analytical – descriptive and library method, this paper explores the concept of preferred share and its efficiency and presents an economic-jurisprudence based analysis of these types of stocks. The hypothesis followed by this paper is that preferred shares are stocks with outstanding interests which can be issued in the framework of Sharia rules with regard to the characteristics appropriate the economic and cultural situation in Iran. The findings show that due to the principle of contagion of ‎stipulation decay (corruption) to contract which has been adopted by the former, later and contemporary Fuqahā' or Islamic jurists, in fact, accumulated dividends cannot change the nature of contract. Then, under every characteristic and condition, preferred stocks are similar to common stocks in nature.