What it is:
How it works (Example):
For example, if Company XYZ preferred stock, those are senior to Company XYZ's common stock shareholders. This means that should Company XYZ go bankrupt, the preferred shareholders are entitled to before the common shareholders are. The common stock is therefore the junior issue.
In another example, if Company XYZ issues bonds, the are creditors who are senior to Company XYZ's shareholders. This means that should Company XYZ go bankrupt, the bondholders are entitled to repayment before the shareholders are. Let’s say Company XYZ needs more now, and it borrows from Bank ABC. Who gets paid first? The bondholders or Company XYZ? It depends on what Company XYZ negotiates with Bank ABC, but it is likely that Bank ABC is now holding , meaning that if Company XYZ goes belly up, the bondholders get paid first, then Bank ABC, then the shareholders (if there’s anything left).
Why it Matters:
Owners of senior securities get their hands on leftover bankruptcy. Accordingly, owners of securities from a junior issue (those further down in the pecking order) are more likely to get stiffed. That is, the more an owner or is, the weaker its claim on the company's assets. This is why the more junior an is, the higher the return investors demand.before others in the event of