20 Investments: Preferred Stock
  1. 20 Investments: Introduction
  2. 20 Investments: American Depository Receipt (ADR)
  3. 20 Investments: Annuity
  4. 20 Investments: Closed-End Investment Fund
  5. 20 Investments: Collectibles
  6. 20 Investments: Common Stock
  7. 20 Investments: Convertible Security
  8. 20 Investments: Corporate Bond
  9. 20 Investments: Futures Contract
  10. 20 Investments: Life Insurance
  11. 20 Investments: The Money Market
  12. 20 Investments: Mortgage-Backed Securities
  13. 20 Investments: Municipal Bonds
  14. 20 Investments: Mutual Funds
  15. 20 Investments: Options (Stocks)
  16. 20 Investments: Preferred Stock
  17. 20 Investments: Real Estate & Property
  18. 20 Investments: Real Estate Investment Trusts (REITs)
  19. 20 Investments: Treasuries
  20. 20 Investments: Unit Investment Trusts (UITs)
  21. 20 Investments: Zero-Coupon Securities
  22. 20 Investments: Conclusion

20 Investments: Preferred Stock

What Is It?
Preferred stock represents ownership in a company, but it usually does not give the holder voting rights (this may vary depending on the company). With preferred shares, investors are guaranteed a fixed (or sometimes variable) dividend forever, while common stocks have variable dividends. One of the main advantages to being a preferred stockholder is that, should the company experience financial trouble and have to liquidate, you would be paid off before the common stockholders (but still after debt holders).

Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at any time - and usually for a premium.

While certainly not as popular as common stock, preferred shares are offered by a wide range of companies. It is important to remember that even though preferred shares are known as a type of stock, they are really more of a cross between a stock and a bond.

Objectives and Risks
The major objective of a preferred stock is to provide a much higher dividend than that provided by common stock. Preferred stock is also much less volatile than common stock and less risky if the company goes bankrupt - a preferred shareholder is far more likely than a common shareholder to get at least some of his/her money back. As a company liquidates, bondholders are paid first, followed by preferred shareholders. Common shareholders are at the bottom of the ladder.

How To Buy or Sell It

Preferred stock trades the same way as common stock, usually through a brokerage, either full service or discount. Commissions to buy preferred stock are usually the same as common stock fees. There is no minimum investment for most preferred stocks, but many brokerages require clients to have at least $500 to open an account. (To learn more, see our Stock Basics Tutorial.)

Strengths
  • Dividends are higher than those of common stocks.
  • If the company goes bankrupt, you have a better chance of getting some money back than common shareholders.

  • Weaknesses
  • Dividends are taxed at the same rate as income, so higher dividends mean you will likely pay more taxes.
  • Rates of return on preferred stock are very close to those for corporate bonds, and corporate bonds are considered less risky.

  • Three Main Uses
  • Provides Income
  • Capital Appreciation
  • Lower Risk
  • 20 Investments: Real Estate & Property

    1. 20 Investments: Introduction
    2. 20 Investments: American Depository Receipt (ADR)
    3. 20 Investments: Annuity
    4. 20 Investments: Closed-End Investment Fund
    5. 20 Investments: Collectibles
    6. 20 Investments: Common Stock
    7. 20 Investments: Convertible Security
    8. 20 Investments: Corporate Bond
    9. 20 Investments: Futures Contract
    10. 20 Investments: Life Insurance
    11. 20 Investments: The Money Market
    12. 20 Investments: Mortgage-Backed Securities
    13. 20 Investments: Municipal Bonds
    14. 20 Investments: Mutual Funds
    15. 20 Investments: Options (Stocks)
    16. 20 Investments: Preferred Stock
    17. 20 Investments: Real Estate & Property
    18. 20 Investments: Real Estate Investment Trusts (REITs)
    19. 20 Investments: Treasuries
    20. 20 Investments: Unit Investment Trusts (UITs)
    21. 20 Investments: Zero-Coupon Securities
    22. 20 Investments: Conclusion
    RELATED TERMS
    1. Preferred Stock

      A class of ownership in a corporation that has a higher claim ...
    2. Preference Shares

      Company stock with dividends that are paid to shareholders before ...
    3. Participating Preferred Stock

      A type of preferred stock that gives the holder the right to ...
    4. Cumulative Preferred Stock

      A type of preferred stock with a provision that stipulates that ...
    5. Prior Preferred Stock

      A type of preferred stock with a higher claim on assets and dividends ...
    6. Current Dividend Preference

      A safety feature of preferred shares, whereby holders of such ...
    RELATED FAQS
    1. What is common stock and preferred stock?

      Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ... Read Answer >>
    2. What are some examples of preferred stock, and why do companies issue it?

      Understand the difference between preferred stock and common stock, and learn the primary reasons why companies issue preferred ... Read Answer >>
    3. Can preferred stocks be traded like common stocks? Are their prices the same?

      First, let's look at the differences and similarities between common stocks and preferred stocks. Both represent a piece ... Read Answer >>
    4. How does preferred stock differ from company issued bonds?

      Discover the primary differences between preferred stock and corporate bonds, two income-generating investment vehicles issued ... Read Answer >>
    5. What are the pros and cons of owning preferred stock instead of common stock?

      Understand and explore the advantages and disadvantages of owning preferred stock as opposed to owning common stock shares ... Read Answer >>
    6. What is the difference between preferred stock and common stock?

      Preferred and common stocks are different in two key aspects. First, preferred stockholders have a greater claim to a company's ... Read Answer >>

    You May Also Like

    Hot Definitions
    1. Return On Invested Capital - ROIC

      A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
    2. Law Of Demand

      A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
    3. Cost Of Debt

      The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
    4. Yield Curve

      A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
    5. Stop-Limit Order

      An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
    6. Keynesian Economics

      An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
    Trading Center