Bonds Versus Preferred Stock

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Advantages & Disadvantages of Preferred Stock & Bonds

Deciding to invest is a huge financial step, not something to be taken lightly. In deciding which method, stock or bonds, one has to look at all the angels- the advantages and disadvantages, both immediate and long term.

Preferred stock has many advantages and disadvantages. Unlike debt, preferred stock is flexible. Meaning preferred stock can miss annual payments unlike typical debt. Preferred stock not only is more flexible, it also helps increase financial advantage of companies. Preferred stock also helps corporations restructure themselves. However, the disadvantages far outweigh the advantages. Common stockholder’s are below preferred stockholders, which means returns for common stockholder’s are always in jeopardy. Preferred Stock generally has a higher cost then debt financing as well. Preferred Stock is also harder to sell, since payments of dividends are not guaranteed. The stock is also restricted by issuing company’s policies, guidelines and qualifications unlike bonds. The major problem with Preferred Stock is the tax implications and the fact that companies are not obligated to pay stockholder’s dividends- those leaving Preferred Stockholder’s empty handed.

Another investment option is Bonds. Bonds are the “safe” way to invest. Bonds are predictable. Interest amount, principal amount, how often paid and maturity date are all known ahead of time. Bonds provide a steady and regular income (monthly/quarterly/semiannual payments). The interest rates on bonds usually exceed those of banks saving accounts. However, because bonds are based on a company’s finances (ability to repay loans), there is always the risk the company who issues the bond can go bankrupt, leaving the bonds either worthless or less than original value. Bonds provide no opportunity for high long term return and the long term money in bonds are tied up in low interest rate for an extended period.

Bonds are the most...
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