What is Preferred Stock?

Those who are keen to study the stock market trends must have realized that the demand for preferred stock has risen for the past few years. According to SNL Financial, the amount of money traded for these stocks hit $7 billion last year, the highest to be witnessed. The increasing demand for these stocks is fueled by the change of perspective among wealthy individuals when investing in big companies.

Preferred stocks are shares that give investors the right to higher claims on a corporation’s assets and earnings than common stocks. The shares that hold preferred stocks have a dividend that must be paid first before others are considered. Individuals who hold these shares do not have voting rights in the company. However, they have the right to receive payments in arrears in case a company chooses to suspend its dividends.

Preferred stocks yield more than common stocks and are usually paid on a monthly or quarterly basis. The shares have less potential to increase in value than common shares. They often trade within a few dollars of their issue price.

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Advantages of Preferred Stocks

One advantage of preferred stock is its tendency to pay higher and regular dividends. This means that it is less volatile and carries no risks. Another benefit of owning this stock is that the shareholder is given priority when a company stops paying dividends.

Reasons Why Companies Issue Preferred Stocks

A company would mainly issue preferred stocks to raise more capital. There are some companies, especially large corporations, who issue preferred stocks to reserve their right of control. Common stocks provide a degree of voting rights to owners, allowing them to make crucial management decisions. Preferred shareholders do not have such voting rights.

Companies can also use preferred shares to lower their debt-to-equity ratio. This ratio is often used to determine the financial stability of a company. The lower the ratio is, the more the business will attract potential investors.

How to Buy Preferred Stocks

Investors can get new profits by investing in preferred shares. But this is only possible if they employ the best practices when selecting and buying these shares. The first thing you need to consider is whether the stock you want to buy meets your investment goals. Preferred stocks might sound great if you are looking for a low-volatility investment with regular dividend payments. Review the payment rights associated with a particular preferred share before you buy it. Reviewing will help you to see if the dividends are guaranteed. It is also wise to compare the advantages and disadvantages of preferred stocks before you own them.

One you weigh your options, go to your online trading account to locate and compare different company offerings. Conduct the due diligence and examine the prospectus and the company’s financial statement. Check the past four fiscal years to see if the company met or exceeded its profit targets. The company should also meet dividend obligations before you invest in it.

Investing in preferred stocks is a good decision if you are looking for something that is less volatile and regular. Be sure to keep in touch with your broker to get the best preferred stock in the market.