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Common Characteristics Of Preferred Stock
Preferred stock are company shares that sold by companies who are looking to raise capital for business operations and expansions but do not want the hassle of increasing the number of common shares. Usually investors who are interested in getting income and increasing the growth of their equity opt to buy these types of shares. |
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Compared to common stock, which gives voting rights to the stockholder, preferred stock offer higher dividend payments with lower risks.
Here are the common characteristics of preferred stock that an investor should be looking for:
- Preferred stock allows the investor a share of ownership in the company that issues the stock. However, this type of stock does not allot voting rights to the shareholder. Instead, preferred stock gives the investor a fixed income that is paid out in the form of dividends, and this dividend is paid before common stockholders receive theirs. In case the company becomes bankrupt, the preferred stockholders are paid after the creditors but before the common stockholders.
- The company issuing the stock guarantees dividend payments as long it is financially viable. Sometimes, if due to business downswing, the company is unable to pay the dividend, it will pay it retroactively.
- Preferred stock is considered to a combination of common stock and corporate bonds. It not only pays dividends to the investor but it also grows in value.
- There are different types of preferred stock and a company will issue a type depending on what its goals are. Cumulative preferred stock does not pay dividends. Rather the dividends are accumulated and the company pays them when it has the ability to do so. Convertible preferred stock is the one which can be converted to common stock under certain circumstances. Participatory preferred stock is one where the company pays extra dividends to the investor. Here the extra dividend is paid in addition to the guaranteed dividend and is only paid out if the company makes substantial profits.
- Preferred stock is less risky than common stock. The company first pays preferred stockholders. In addition, the price of preferred stock is closely linked to the rate of return that the dividend pays. Therefore, the value of this stock does not increase as fast as that of common stock when the company is doing well.
- When a company issues preferred stock, the funds raised do not have to be paid back. This allows the companies write off a portion of the dividends as expense and therefore reducing the taxable income.
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Stock Market :
Find Preferred Stock Funds
 Preferred stock is considered to be a combination of common stock and corporate bonds. When an investor owns preferred stock of a company, he gets twofold advantage. One is that the stock will appreciate in value; and the second being that the dividend paid is higher for the investment made. It is quite possible for an investor to get 2 or 3 times more than what an average savings account pays for owning their stock. More..
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