What are Preferred stock or what is also called Preference share?
These class of stock are now heard of in the business sections of the newspaper and of course I believed you might wonder what are these.
source: http://www.proactiveinvestors.com/
In my previous post(click here) I have shared with you the two main classification of a company’s proof of ownership that is common and preferred shares. Now Common stock are the usual stock that you see day in and out in the stock market. We rarely see preferred stocks being mentioned.
Preferred stocks are another class of ownership shares that are as the name says preferred not by investors actually but are preferred as to its liquidation and to its dividend payment. Such shares are more like a fixed investment since it has an indicated rate of return unlike a common share which is whatever is the balance becomes the return of investment.
Two main features: Preference to liquidation and dividend priority.
Preferred shares if compared as to liquidation is like a liability. When a company comes to a bad situation where it needs to be liquidated, Preferred shares gets priority over common shares. It is treated like a liability which needs to be settled as much as the company can.
Such quality makes it more like a loan to a company rather than an investment. Also like an ordinary loan, some preferred shares have specific dividend payment which would make it look like an interest. It could be a quarterly, semiannual, or annual payment of a certain rate of the company’s income(as long as it is within the Retained earnings amount).
It gets priority as to dividends as well. When a company declares dividend what the common share will get is after deducting what goes to preferred shares after computing it based on the specified rate. Also some has a cumulative specification meaning if the company didn’t declare dividend in the past years due to no income and suddenly declares, preferred shares will have the right for previously unpaid dividend based on the rate.
When to invest in preferred shares?
Well investing in preferred shares is just like what I have mentioned is loaning to a company. If you don’t intend to monitor your stock investment and would rather have a regular return then investing in preferred shares might be the best for you. But if you intend to go this way may sure to pick a company that have a stable fundamentals and has long track of dividend payment. Having such reputation will ensure that yearly you will get a return from your investment at least better than what banks offer.