1. 25 Investments: Introduction
  2. 25 Investments: American Depository Receipt (ADR)
  3. 25 Investments: Annuity
  4. 25 Investments: Art and Collectibles
  5. 25 Investments: Bonds
  6. 25 Investments: Cash
  7. 25 Investments: Closed-End Investment Fund
  8. 25 Investments: Common Stock
  9. 25 Investments: Convertible Bonds
  10. 25 Investments: Corporate Bond
  11. 25 Investments: Futures Contract
  12. 25 Investments: Life Insurance
  13. 25 Investments: The Money Market
  14. 25 Investments: Mortgage-Backed Securities
  15. 25 Investments: Municipal Bonds
  16. 25 Investments: Mutual Funds
  17. 25 Investments: Options (Stocks)
  18. 25 Investments: Exchange-Traded Funds
  19. 25 Investments: Preferred Stock
  20. 25 Investments: Private Equity
  21. 25 Investments: Real Estate & Property
  22. 25 Investments: Real Estate Investment Trusts (REITs)
  23. 25 Investments: U.S. Treasury Securities
  24. 25 Investments: Unit Investment Trusts (UITs)
  25. 25 Investments: Venture Capital
  26. 25 Investments: Zero-Coupon Securities
  27. 25 Investments: Conclusion

Preferred stock (or preference shares) is another hybrid security that combines some features of stocks and bonds.  Technically, preferred stock is still a stock and trades on an exchange.  It also pays a dividend, though it is generally higher than a similar common stock from the same company.  But it has bond like features in that the dividend payment is fixed and the security can have a liquidation value.  It can also be callable. 

 

Unlike a bond coupon, a preferred dividend is not an obligation.  However, it can be cumulative in that past payments not made must be paid before common dividends start to be paid again.  Preferred stock holders don’t get voting rights like common stock owners, but they are higher on the corporate structure when it comes to being paid out in case of bankruptcy (bond holders still rank higher).

 

Objectives and Risks

 

The major objective of a preferred stock is to provide a much higher dividend than that provided by common stock. As a company liquidates, bondholders are paid first, followed by preferred shareholders. Common shareholders are at the bottom of the ladder.  Under normal market conditions preferred stock is less volatile than common stock.  But in volatile periods, such as 2008 and following the financial crisis, preferred stock can be just as volatile.

 

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. (To learn more, see our What is the difference between preferred stock and common stock?)

 

Strengths

 

Dividends are higher than those of common stocks.

Higher in capital structure than common stock holders

Liquid

 

Weaknesses

 

Can be just as volatile as stocks

Bondholders higher on capital structure

No voting rights

 

Key Considerations

Liquidity:  High

Historical Returns:  High

Inflation Protection:  Medium


25 Investments: Private Equity
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