As we all know that preferred stock is also known as preferred shares, preference shares or simply preferreds. Preferred stock is an equity security that can have any combination of features not possessed by common stock. Generally it considered a hybrid instrument. These stocks are rated by the major credit-rating companies and the rating is generally lower. In other way we can also say that preferred stock is a special class of shares that have no combination of features by common stock.
Usually Preferred stock does not carry any voting rights but it carries a dividend and may have priority over common stock in the payment of dividends and upon liquidation. Preferred stock has the feature of callability that is a good option of the corporation. They have preference to dividend payments. It can be cumulative or noncumulative. A cumulative preferred means those stocks that requires that if a company fails to pay dividends below the stated rate, it must make up for it at later time and non-cumulative means a stock without this feature or straight.
Importance of preferred stock –
Preferred stock investing is very important for all the investors. It provides many benefits to them. If we see according to a company’s view we will see some great points about preferred stock such as,
* Preferred stock increases financial leverage because the preferred dividend is a fixed obligation and there is also no default if the dividend is not paid. Thus it offers the company a risk less advantage.
* There is no specific time to call the preferred stock because the maturity period of perpetual preferred stock is not specified. The firm can easily postpone the dividend payment.
* Preferred stock also provides the fixed dividend. The preferred dividends are restricted to the stated amount so that preferred shareholders don not need to participate in excess profit as the ordinary shareholders do.
How to invest in preferred stock?
* When it comes to invest in preferred stock, every investor wants some easy and good way so they can be a successful investor. There are few steps that investor should follow before investing in preferred stock.
* This is the first and a very important step for all investors to take the identify viable stocks that can fit in the investors’ requirements in term of the risk level and the amount of return that is generated more or regularly less by the shares.
* Preferred stock investing also requires the future consideration as well as the performance of the stock. Investors should also focus the historical performance of the stocks they are selecting.
* Another important thing is to read the terms of the preferred stocks in the certificate of designation. These terms will help the investors to know about the dividend payment, rights of the company to redeem the preferred stock and the degree of priority.
* Investors should be aware that preferred stock dividends are always paid at the discretion of the company so that they could be deferred in times of financial distress at the time when you need the dividends the most.
Why do companies issue preferred stock?
This is an important question that why do companies issue preferred stock? The companies issue preferred stock because they have already loaded their balance sheet with a large amount of debt and risk a downgrade if they piled on more. Some companies often issue preferred stock for regulatory reasons. There is an another reason for issuing preferred stock by the companies that it can be structured to look like debt from a tax perspective and like common stock from a balance sheet perspective.
At the bottom line we can say that preferred stock investing can give more income and flexibility to the investors. Preferred stocks are also traded on both exchanges and over the counter markets. The brokers, whose quote box does not recognize the ticker symbol of a company’s preferred stock, they may not carry that particular preferred stock.
We will be picking up our next topic i.e. dividend yield.
A leading source for in-depth research & analysis on Preferred stock quotes.
By Unsplash from Pixabay