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Preferred Stocks

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on 26 September 2013

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Transcript of Preferred Stocks

Preferred Stocks
Definition- A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock.
Preferred shares are hybrid instruments that have both debt and equity features. Preferred shareholders rank ahead of common shareholders in terms of dividends and claims on assets, but their claims are subordinate to those of debt-holders aka they give up their right to vote. Continuing, preferred share dividends are also taxed favorably in a number of jurisdictions.
List of all Preferred Stocks
Are they High Risk?
Preferred shares offer yields (often exceeding 6%) but also offer the opportunity for capital appreciation. However, Like fixed income securities, preferred securities are sensitive to changes in the interest rates. In the event of rising interest rate, the value of these securities will fall as these securities behave like bonds as far as interest rate risk is concerned. This is due to their relationships with banks. This leaves the with moderate risk and little room for yields.
In Conclusion...
Preferred stocks are a hybrid between a debt instrument such as a bond and an equity such as common stocks. It's often said that preferred stocks have the advantages of neither and the disadvantages of both. Preferred stocks are junior to bonds in a liquidation and have no stake in the company. Preferred stocks do provide a more reliable dividend income than common stocks but the dividends though defined contractually, they are not obligated as the coupon payments of the bonds are contractually obligated. The company doesn't have to pay the dividends to the preferred stock, they simply cannot pay any dividends to common stock till all the dividends defined in the preferred stock has been paid including arrears if the preferred stock are cumulative shares.The fundamental disadvantage of preferred stock is that it's not really equity at all in the sense that it does not represent an ownership interest in the company. That means if the common and preferred are both $10 and the company hits pay dirt, the common will go to $200 and the preferred will go to $10.50 (the extra 0.5 only because it became more creditworthy).

Shares of preferred stock. Its the way of the future.
Common Stock VS Preferred Stock
Why Want Preferred Shares?
Evidence is Clear
Notice anything?
BUT. Are they better than common stocks?
Full transcript