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

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
    Related Articles
    1. Managing Wealth

      The Advantages of Preferred Dividends

      Preferred dividends are cash distributions a company pays on its preferred shares.
    2. Investing

      A Primer On Preferred Stocks

      Offering both income and relative security, these uncommon shares may work for you.
    3. Managing Wealth

      An Example of Dividends in Arrears

      Learn 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.
    4. Investing

      Valuation Of A Preferred Stock

      Determining the value of a preferred stock is important for your portfolio. Learn how it's done.
    5. Investing

      Looking for Yield? Check Out This Preferred Stock ETF (PFF)

      Take a look at a review of the performance of the most popular preferred stock ETF, the iShares U.S. Preferred Stock ETF from BlackRock.
    6. Financial Advisor

      What Is The Difference Between Preferred Stock And Common Stock?

      Most investors are familiar with common stock, but many know little about another form of company ownership: preferred stock.
    7. Investing

      PFF vs. PGX: Which Preferred Stock ETF is Better?

      Get a review and analysis of the two most popular preferred stock ETFs for investors looking for yield to consider adding to their portfolio.
    8. Investing

      The True Risks Behind Preferred Stock ETFs (PFF, FPE)

      Consider the risks of investing in preferred stocks, including lack of diversification and sector risks in preferred stock ETFs.
    Frequently Asked Questions
    1. Where do most fund managers get their market information?

      Many fund managers, whether they manage a mutual fund, trust fund, pension or hedge fund, have access to resources that the ...
    2. What's the difference between short-term investments and marketable securities?

      Understand the difference between short-term investments and marketable equity securities, and learn the importance of short-term ...
    3. Are fringe benefits direct or indirect costs?

      Learn how to allocate costs associated with fringe benefits provided to employees and how to determine when a cost is either ...
    4. How is a bank guarantee different from a traditional loan?

      Read about the differences between a traditional bank loan and a bank guarantee, and why a third party might require a guarantee ...
    Trading Center