If you’ve been investing in the stock market then eventually preferred stocks would’ve come up. Preferred stocks or preference shares are quite different from common shares you are holding. It is said that preferred stocks are the chameleons of the investing world. Many investors don’t know about the preferred stocks or preference shares and whatever they claim to know are based on rumors or incomplete information. But not anymore!
Because in this section we will help you to learn more about preferred stocks and why investors want them so badly.
So, let’s start with –
What is a “Preferred Stock”?
Preferred stock is a more like a hybrid of common shares and bond issues. It is because most kinds of preferred share dividends are fixed at a set rate when they’re issued.
In other words, the preferred stock is a class of ownership in a corporation that has higher earnings and claims on its assets than common stock.
The reason why it called a hybrid of common shares and bond issues because it has a fixed dividend which makes preferred stocks income similar to interest get on bonds.
Why Preferred Stocks in Demand?
“Preferred stocks” is a way of raising funds to finance upcoming projects and expansion. However, there are other ways like debt and equity issues but many companies elected to issue preferred stock in addition to common stock or corporate bonds.
There are a lot of reasons for doing this. First one is the hybrid nature of preferred stock which we already discussed. But, that’s not all. Investors value preferred stocks because preferred shareholders are paid out first before common dividends are issued. And if the corporation enters bankruptcy, then the preferred shareholders are entitled to pay out first from the company’s assets.
However, the preferred shareholders do not hold any voting rights as the common shareholders usually do.
The significance of preferred stock is its consistent dividend payments which are neither like long maturity dates of bonds nor like the market fluctuation of common stocks.
But, the fixed dividend payments can be postponed by the company if it’s going through the period of tight cash flow or other financial problem. It allows the company to have maximum flexibility without the fear of missing any debt dividend payment. However, a missed bond payment puts the company at risk of default which could lead to forced bankruptcy.
Since the common shareholders have more facilities than preferred shareholders like voting rights and opportunity to impact crucial managerial decisions, many companies limit the control they give to shareholders while offering the same position in the business by turning to preferred stock as an alternative. This gives shareholders the almost the same benefits expect less influence on corporate policymaking decisions and selection committee.
Final Thoughts: –
In a nutshell, we can say that preferred shares are an optimal alternative for equity investors in the stock market. One who is looking for the steady flow of dividend payments should invest in preferred stocks of a company. These shares are callable so the issuer can redeem them at any time, providing investors more options compared to common shares.
If you have any query or would like to add something up then don’t forget to mention in the comment section below.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.