What are Preferred Stocks?
Preferred stocks, also known as preferred shares, are a unique type of equity security that combines features of both stocks and bonds. They are less risky compared to common stocks, primarily because they have preferential treatment regarding dividends and asset distribution in the event of liquidation.
Key Characteristics
- Dividend Payments: Preferred shareholders receive fixed dividends before common shareholders. These payments can be cumulative, meaning unpaid dividends accumulate until paid.
- Less Volatility: Preferred stocks tend to be less volatile than common stocks. Their prices are often more stable, making them an attractive option for conservative investors.
- No Voting Rights: Typically, preferred stockholders do not possess voting rights, limiting their influence in corporate decisions compared to common shareholders.
- Convertibility: Some preferred stocks can be converted into common shares, providing potential for capital appreciation.
- Callable Feature: Companies may have the right to redeem preferred shares at a set price after a certain date, providing flexibility.
Suitability for Investors
Preferred stocks are suitable for income-focused investors, particularly those seeking a steady income stream through dividends. They are often used in dividend investing strategies, providing a blend of growth potential with stability. However, investors must weigh the benefits against potential limitations, such as lack of voting rights and sensitivity to interest rates.