April 19, 2015
Preferred stocks are referred to as such due to being valued over common stocks that are issued. Preferred stocks also have certain attributes that commons stocks do not offer which make them more appealing to potential investors. Preferred stocks will often pay out dividends before common stocks do, and that dividend rate is often higher than what common stock would receive. Preferred stock is sold as a way to raise capital in a company as opposed to issuing bonds. In some situations, preferred stock can be converted to common stock at a fixed amount, for example, 3 shares of preferred stock may be worth 6 shares of common stock. This would allow the preferred shareholder, who maintains all the perks of being a preferred share holder even though they now own common stock, the chance to participate in the growth of the company. Preferred stock also gives the company the ability to buy back stock at certain times for a fixed dollar amount. This could be beneficial to both parties, but could also come as a loss to the shareholder should they choose to sell their shares. If I were looking to invest, I would consider selecting preferred stock over common stock. I would only select preferred stock if it had the provision which allowed me to convert to common stock. That being said, there is greater chance for personal profit if I have common stock because it allows me to share in the company’s growth as opposed to being bound by the fixed amount that is earned. There is less of a chance that I will see a high rate of return on my investment with preferred stock due to the protection of the stock. The limited fluctuation that is allowed for loss also limits the amount of gain the stock has the potential to earn.
Plaehn, T. (1999-2015). Why are preferred stocks referred to as preferred? Retrieved from...
References: Plaehn, T. (1999-2015). Why are preferred stocks referred to as preferred? Retrieved from http://www.ehow.com/about_6122349_preferred-stocks-referred-preferred_.html
Preferred Stock Features – Complete Guide to Corporate Finance. (n.d.) Retrieved from: http://www.investopedia.com/walkthrough/corporate-finance/3/stock-valuation/preferred-stock.aspx.
Koba, M. (2012) Preferred Stock: CNBC Explains. Retrieved from http://www.cnbc.com/id/44517614#.
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