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
Related Articles
  1. Investing

    Understanding Preferred Stocks

    Companies choose preferred stock for many reasons some being the flexibility of payments and easier to market. Learn the pros and cons of preferred stocks.
  2. Investing

    Valuation Of A Preferred Stock

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

    Investing in Preferred Stock:The Basics

    Preferred stocks provide income as well as the potential to appreciate in value.
  4. 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.
  5. 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.
  6. Investing

    Income Funds 101

    Income funds don't have to be bonds, there are plenty to choose from. Read up on the types of income funds and whether they fit your investment needs.
  7. Investing

    Introduction to Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  8. Financial Advisor

    4 Reasons a Company Might Suspend Its Dividend

    Learn about the four most common reasons a company may choose to suspends its dividends, including financial trouble, funding growth and unexpected expenses.
  9. Investing

    Know your shareholder rights

    Common-stock owners have numerous privileges and should be vigilant in monitoring a company. Read on to learn what rights you have as a shareholder.
Trading Center