Preferred Stocks
The Evaluation Of Stocks
preferred stocks
Because stocks are simply small shares of a company, the more stocks you purchase to more you own of a certain company.
Common Stock
Basically stated, a common stock is, well, common! When you hear people talking about stocks in general, it is these types of stocks in that they are referring. Interestingly enough, investors in common stocks receive one vote per stock owned to elect board members, the people who oversee major decisions made for the company as a whole, for a particular company.
Preferred Stock
In general, preferred stock is stock that is owned by preferred stockholders in that all of the companys earnings and assets go directly to the preferred stockholders first. Because preferred stockholders are paid before common stockholders, preferred stockholders choose to give up their right to vote in the election of board members. For this reason, preferred stockholders have no right in the selection process of the company. Preferred stockholders purchase stock in a certain company for monetary gain only in that their main goal in investment is earning a return on investment. Of course, there are four variations on preferred stock investments.
Voting – Preferred stock members can opt for the right to vote in a company in that they own stock. Adjustable Rates – Preferred stockholders receive an agreed upon profit based on stipulations provided by the company.
Convertible Stock – Preferred stockholders have the right to convert their preferred stock into common stock, allowing the investor to lock in their profit while they potentially profit from a rise in common stock. Participating Stock – With this type of stock, preferred stockholders not only receive a set profit, but they are eligible for a certain percentage of the companys earned profit over a set period of time.
Because common stocks and preferred stocks are so different, companies are not allowed to customize either type of the stocks. Companies are held under law to make sure that the voting power remains fair among both common stockholders and preferred stockholders. It is important to know precisely what stocks are as well as the main characteristics of a common stock as well as a preferred stock.
High Yielding Alternatives – Preferred Stocks an Easy Solution
Although “preferred stocks” may be a great investment option for income, the word “stock” is the name is often misleading. This means that if interest rates fall, a company can take back the shares and pay you at the price at which they were issued.
Many analysts agree that one of the positives of Preferreds has been their relatively stable share price. That stability comes from knowing the level of future dividends, so long as the companies continue to meet all of their debt obligations, whereas with common stock, by contrast, companies can cut dividends during lean times without any warning.
Generally, Preferreds are susceptible to the same risk factors as bonds, like inflation and rising interest rates. For the most part, if a company misses earnings estimates, that might affect the common stock, but not the Preferreds. For the Individual investor, Preferreds are easier to own than individual bonds. For tax purposes, there are two flavors of preferred stocks. Many preferreds have dividends that are eligible for the qualified dividend tax rate-15 percent for most investors-because the dividends are paid with after-tax dollars, while others pay dividends that are taxed at an investor’s federal income tax rate. If you are buying an individual security, the prospectus will say whether it pays qualified dividends.
