When it comes to stock ownership, there are two main types: preferred stocks and common stocks.
Common stocks allow investors to become owners of the company in which they have invested, providing them with voting rights and a claim to the company’s assets and earnings.
By contrast, preferred stocks provide investors with a higher priority claim to assets and earnings, but do not include voting rights.
Investors value preferred stocks for their relative stability and their higher claim on assets and earnings than common stocks.
In terms of dividends and bankruptcy liquidation, preferred stocks have priority over common stocks.
Preferred stockholders are the first to receive payments from dividends and liquidation proceeds.
Preferred shares also have a callability feature which gives the issuer the right to redeem the shares from the market after a predetermined time.
Investors who buy preferred shares may benefit from a redemption rate representing a significant premium over their purchase price.
When it comes to long-term gains, common stock tends to outperform both bonds and preferred shares.
The value of common stock is regulated by demand and supply of the market participants, while the value of preferred stock is affected by interest rates.
When interest rates rise, the value of the preferred stock declines, and vice versa.
The price of preferred stocks is typically more stable than common stocks, and investors will receive a dividend based on a fixed face value, rather than the market value.
The primary difference between preferred stock and common stock is that preferred stock acts as more of a bond with a set dividend and redemption price.
Unlike common stock, investors in preferred stocks do not receive voting rights.
Additionally, if a company declares bankruptcy and must shut down, creditors and bondholders are paid back first, ahead of common shareholders.
When it comes to taxes, institutional investors receive preferential tax treatment on their dividends compared to individual investors.
It is also important to keep in mind that companies that issue preferred stocks may be loaded with debt, and this could pose legal limitations on the amount of additional debt they can take on.
Ultimately, preferred stocks are a great way to add value and yield to a portfolio, but investors should always do their due diligence to ensure they have a thorough understanding of the financial position of the company before investing.
