What are preferred stocks?
Preferred stocks are often used as a form of financing when a company needs money quickly. Companies use them to raise capital because they are more attractive to investors than other forms of debt. Investors prefer preferred stocks because they provide a better rate of return than common stock.
stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends.
Merriam Webster Online
Definition of preferred stock
stock guaranteed priority by a corporation’s charter over common stock in the payment of dividends and usually in the distribution of assets
Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument. Preferred stocks are senior (i.e., higher ranking) to common stock but subordinate to bonds in terms of claim (or rights to their share of the assets of the company, given that such assets are payable to the returnee stock bond) and may have priority over common stock (ordinary shares) in the payment of dividends and upon liquidation. Terms of the preferred stock are described in the issuing company’s articles of association or articles of incorporation.
What are the risks associated with preferred shares?
There are risks associated with preferred stocks, especially when they are issued at high prices. If the price drops, the value of the preferred stock will also drop. This means that the company issuing the preferred stock has less money available to repay its debts.
How do you buy and sell preferred shares?
Preferred stocks are often used as an investment vehicle for large institutional investors who need to invest in securities that offer them better returns than other investments. These investors might buy preferred stocks because they expect the price to rise over time.
Preferred stockholders receive dividends before common shareholders do, so they are more likely to sell at a premium. If you own preferred shares, you should consider selling them when the market is strong and buying them back when the market is weak.