What is Preferred Stock

If you are somewhat familiar to the investment world, you may have heard of preferred stock. Also called preferred shares, these are stock shares that pay a dividend. This dividend is a fixed amount. As you can see, this makes preferred stocks rather unique as compared to traditional stocks. The reason the word preferred is used is because the dividends are distributed to those who hold preferred shares before common shareholders are paid. There are bonds, which pay a fixed dividend. A preferred stock also pays a dividend but unlike bonds the dividend is not a legal requirement for the company. Common share dividends fluctuate depending on the financial performance of the company.

While there are clear advantages to preferred stocks, there are also disadvantages. For example, those who hold preferred stock shares are unable to vote and do not have the same type of potential for profit that regular stock holders do. This is because their dividend does not change, unlike other stocks that go up and down. However, a fixed dividend helps protect against loss as well. Not all companies offer preferred stocks. New companies may do so in an attempt to grow their capital.

Now that you know what is preferred stock, you should know about the different kinds. One type you may want to look into is convertible. This type of preferred stock can be converted into a common stock for a fee. This is a good thing if stock values rise dramatically and profit would be larger than the dividend. Then there are shares known as cumulative preferred. These let companies skip dividend payments but it is required that the company repay the dividend at a future time. Non-cumulative shares are not as appealing as the company does not have to repay the dividend if it is missed. Then there are participating preferred shares, which sometimes pay out extra dividends if company performance is good.

You may find that a preferred stock has a date of maturity, which is when it must be traded for cash or converted to common shares. Some preferred stocks do not have a maturity date. Others allow the shareholder to make the decision about when to cash or convert their stocks. Like every type of investment, there are both positive and negative things about preferred stocks. If you are not sure, consider using the services of a professional financial advisor. This type of professional can help you figure out if this type of stock is right for you, and help choose companies in which to invest based on various reports.

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