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.)
|Three Main Uses
Managing WealthPreferred dividends are cash distributions a company pays on its preferred shares.
InvestingOffering both income and relative security, these uncommon shares may work for you.
Managing WealthCurious about preferred shares? Here's what you should know about these bond-like instruments.
InvestingPreference shares, also referred to as preferred shares, are equity shares that give the shareholders certain rights ahead of common shareholders. For instance, when the corporation declares ...
Managing WealthPreferred and common stocks are different in two key ways.
Managing WealthConvertible preferred stock is preferred stock that can be converted into common stock as of a predetermined date at a specified ratio.
InvestingWhat is the difference between corporate bonds and preferred stock? The following are a list of pros and cons for each investment.
Managing WealthLearn about the concept of dividends in arrears and which shares of stock guarantee payment of accrued dividends even if the company doesn't turn a profit.
InvestingDetermining the value of a preferred stock is important for your portfolio. Learn how it's done.
InvestingTake a look at a review of the performance of the most popular preferred stock ETF, the iShares U.S. Preferred Stock ETF from BlackRock.