Beginner's Guide To Preferred Stock
02:11In this video, I’m going to be telling you all about preferred stock.
What is preferred stock?
Like common stock, preferred stock represents a class of ownership in a corporation. However, the rate of return is fixed instead of variable.
The fixed rate of return is represented by its annual dividend and is stated as a percentage of par.
Unlike common stock, preferred stock has no voting rights and no preemptive rights. Also, all publicly traded corporations issue common stock, but not all issue preferred stock.
Benefits of owning preferred stock
#1. Dividend preference
-If a company pays dividends, preferred stockholders must be paid before common stockholders.
#2. Priority at dissolution over common stock
-If a company goes bankrupt, preferred stockholders take priority over common stockholders.
Risks of owning preferred stock
#1. Purchasing power risk
-When buying preferred stock, you are given a fixed rate of return; however, this rate doesn’t take inflation into consideration. Because of this, you won’t be able to purchase as much in the future as you can today.
#2. Interest rate sensitivity
-When interest rates go up, the value of preferred stock goes down.
#3. Decreased or no dividend income
-If the company that pays dividends loses money that year, the amount of dividends paid could be decreased or cut out all together for that year.
#4. Priority at dissolution
-Though preferred stockholders take priority over common stockholders, they’re still paid after all creditors.
Types of preferred stock
1. Straight (noncumulative)
-This type has no special features beyond the stated dividend payment.
2. Cumulative
-This type accrues payments in the event dividends are reduced or suspended.
-When the company resumes dividend payments, cumulative stockholders will receive current dividend payments plus dividends in arrears.
3. Callable Preferred
-This type allows a company to replace high fixed dividends with a lower one by buying back shares from the investors at a stated price on a specified date.
4. Convertible Preferred
-This type allows shareholders to exchange shares for a fixed number of shares in the company’s common stock.
5-This type usually has a lower stated dividend than other preferred stocks because converting to common shares gives the opportunity for greater capital gains.
5. Adjustable rate preferred
-This type has variable dividend rates that are usually tied to other interest rate benchmarks such as Treasury bills.
-The price of this stock stays relatively stable, so if you’re an investor looking to gain income through preferred stock, this type wouldn’t be a good option.
6. Participating Preferred
-This type offers stockholders a share of corporate profits that remain after all dividends and interest is paid to other securities.
Time Stamps
00:00 - Intro
00:26 - What is preferred stock?
01:41 - Benefits of owning preferred stock
02:11 - Risks of owning preferred stock
04:07 - Types of preferred stock
09:49 - Recap
10:28 - Outro
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