Stocks
Heather Anderson
11/17/2014
XACC/291
Celena Hudak Preferred Stocks
Preferred stock is a type of stock issued by a business that usually pays a fixed dividend prior to any distributions to the holders of the common stock of the business. (Tools, 2014) Preferred stock has voting rights.
Preferred stock dividends may be stated as a fixed amount (such as $5) or as a percentage of the stated price of the preferred stock. For example, a 10% dividend on $80 preferred stock is an $8 dividend. (Tools, 2014)
There are many features in preferred stock that to have investors want to buy or making it easier for a company to buy back the stock. A company can have callable. This gives the company the ability to buy the stock back at a specific date and predetermine price. Convertibility gives investors the option to convert their preferred stock into a pre-determined number of shares of the company's common stock at some point in the future. Cumulative feature forces the company to pay the full amount of dividends not paid before they can common stockholders. Participative this feature can really cut into the common stockholders and many companies’ only uses this if there is no other means of raising capital. All of the features listed above are attractive to investors except for callable.
Preferred stock is offset by the callability, interest-rate and other risk factors that come along for the ride. And while some investors might be perfectly willing to take on these risks, there are additional complications to consider. Preferred shares carry multiple risks, not least of which is an uncertain future in light of new financial regulations, but that isn't to say they don't have any merit as a potential source of extra yield for income investors. When investing in stock, you need to figure out what the risks are and what are you willing to risk. (Insights, 2014)