A stock, also known as a share, is a financial product you can use to invest in a company. In exchange for your investment, you become a part-owner of that company. There are two main types of stock – the common stock and the preferred stock. The majority of shares for sale to retail investors are common shares. While retail investors can invest in preferred stock, it is more often bought by institutions and funds.
The composition of the value of a preferred stock is twofold, lying between stocks and bonds (sometimes called hybrid securities). Preferred stocks are often compared with the characteristics of bonds. Preferred stocks usually have guaranteed fixed, regular dividend payments in perpetuity and have a maturity date to receive the redemption value.
An organisation can have multiple issues of preferred stock ordered by priority with first, second, third, et cetera. Investors can then purchase these preferred stocks are then purchased via a broker such as DEGIRO.
To better understand this product, this article looks at the main characteristics and elements of preferred stock, the differences compared to common stock and discusses the advantages and disadvantages.
There are several differences between preferred stock and common stock. Below are some of the main differences:
As a preferred stock, the value will trade around the stock's par value and is often used to raise capital. There are not many companies that issue preferred shares on the London Stock Exchange. Some examples are:
In the United States, the trade in preference shares is considerably larger than in the UK.
There are many types of preferred stock. Some of the more common ones are cumulative, participating, convertible and callable. Below we explain each of them.
The conversion can be advantageous in earning higher dividends, benefiting from higher company profits or the increase of common stock price through conversion. Still, it depends on the market price of the common stock.
It is possible that there is overlap between types of preferred stock. For example, a preferred stock can be considered both cumulative and participating.
There are several advantages to holding preferred stocks. They can:
Preferred stocks also distinguish themselves by being relatively low-risk investments while providing a stable future cash flow. They are also more predictable than common stocks and rated by major credit rating agencies.
While preferred stocks offer several advantages, you should consider the disadvantages as well. Compared to common stocks, preferred shareholders typically do not have voting rights. Also, while you receive regular dividend payments, there is limited upside potential. Lastly, fixed dividend payments are sensitive to interest rate changes.
With DEGIRO, you can invest in preferred stocks. We are currently not opening US or Swedish preferred stocks due to tax implications, however, there are plenty of others to choose from. Register an account with us entirely online today and start investing in preferred stocks.Open an account
The information in this article is not written for advisory purposes, nor does it intend to recommend any investments. Please be aware that facts may have changed since the article was originally written. Investing involves risks. You can lose (a part of) your deposit. We advise you to only invest in financial products that match your knowledge and experience.