The Basics of Investing In Preferred Stocks
If you’ve ever done any investing at all, chances are you know what a stock is. The kind of stock that companies most often issue is called common stock, which gives you a share in the company’s profits through dividends and/or if the price of the stock goes up. You’re also usually given voting rights, so depending on how many shares you own, you may have some ability to exercise control over corporate policy and management issues.
But there’s another type of stock, one that you may not have heard of, called preferred stock. It looks and acts in many ways like a kind of hybrid form of common stock and bonds, but there are crucial differences. It may be generally less volatile than common stock, but also typically has less potential for profit. They’re designed to give you fixed, regular dividend payments, unlike the variable dividend payments sometimes offered to common stockholders. Preferred stock shareholders also receive their dividends before common stockholders receive theirs, and these payments tend to be higher. Of course, that depends on the company’s ability to pay as promised, which is never guaranteed.
With preferred stocks, you’re generally not given voting rights, but you do have what’s known as a “higher” claim to the company’s assets. So in the event that a company declares bankruptcy and has to be liquidated, preferred stockholders are paid before common stockholders. Keep in mind, though, that you do have to wait in line behind those who are owed taxes and wages, and after the secured and unsecured bondholders have been made whole. Being in a senior secured position does not guarantee the safety of your principal, so make sure you’ve considered your risk tolerance before you invest.
Preferred stocks are sometimes referred to as hybrid securities because they have elements of both common stocks and bonds. They’re often issued by banks, utilities and other institutions, and they tend to behave more like fixed-income securities than commons stocks.
So even though they’re issued in shares like common stock through an initial public offering, they typically trade at a relatively stable price. Most often we see them issued at a par value of $25, and, unless they miss or cut the dividend, they may only go up or down by a dollar or two in price during their lifetime. The interest or dividend income is usually paid on a quarterly or semiannual basis, and this income is often what makes them attractive to investors. Preferred shares also resemble bonds in some respects, as their prices tend to rise and fall inversely with interest rates.
These are just a few of the basic characteristics of preferred stocks. Some preferred shares also come with additional features that may make them more (or less) attractive to investors depending upon the current interest rate environment. The question for you is this: are preferred stocks suitable for me and my goals? That’s an important question, and your advisor can help you navigate that path.
Information presented should not be considered specific tax, legal, or investment advice. You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.
No client or prospective client should assume that the information contained herein (or any component thereof) serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group, its investment adviser representatives, affiliates or any other investment professional.
It is important to keep in mind that investments in fixed income products are subject to liquidity (or market) risk, interest rate risk (bonds ordinarily decline in price when interest rates rise and rise in price when interest rates fall), financial (or credit) risk, inflation (or purchasing power) risk and special tax liabilities. Interest may be subject to the alternative minimum tax. Treasury securities are backed by full faith and credit of the U. S. Government but are subject to inflation risk.
Rick Plum is a registered representative of, and offer securities through, Lucia Securities, LLC, a registered broker/dealer, member FINRA/SIPC. Advisory services offered through Lucia Capital Group, a registered investment advisor, and an affiliate of Lucia Securities, LLC. Registration with the SEC does not imply a certain level of skill or training.