Preferred Stocks Q & A

What Are Preferred Stocks?

In case you’re not familiar with them, preferred stocks are a sort of hybrid between stocks and bonds. Investors use them as a cash-flow-generating investment since they pay a regular, fixed dividend. In that way they are similar to bonds, which pay a regular, fixed interest payment.

Someone looking at preferred stocks

Also like bonds, preferred stocks have a face amount or par value. When and if the issuing entity wants to retire the preferred stocks, they do so by paying the holders of the preferred stocks the face amount.

Unlike bonds, preferred stocks do not have a fixed maturity date. The issuing company may just continue to pay the dividends on the preferred stock for decades. At the option of the issuing company, they may pay off, or call the preferred stock shares at any time after a specified earliest call date, but they are not obligated to do so.

In some ways preferred stocks are like what we normally think of as stocks, which are properly called common stocks. Like common stocks, preferred stocks trade on the major stock exchanges and investors buy and sell them through their regular stockbrokers. Also like common stocks, preferred stocks represent equity in the issuing company, not debt. But unlike common stocks, each share of a preferred stock entitles the investor to a fixed number of dollars of equity, not to a fixed percentage of the company’s total equity. For this reason, preferred shares are not expected to rise in value along with the common shares. Preferred stocks’ market prices do fluctuate, but in a much narrower range than common stocks. Preferred stocks are not investments for growth – they are investments for steady cash flow.

With this background, here are the answers to several recent questions I’ve received on preferred stocks:

Q: Where can I get information on what preferred stocks are available?

A: Several web sites have good information on preferred stocks. At the time of this writing these include the free sites dividendinvestor.com, preferredstockchannel.com, and quantumonline.com. These are not recommendations, just examples, and there are others, so do your research and choose the one that fits your needs best. Neither I nor Online Trading Academy have any affiliation with any of these web sites.

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