Preferred Stock

Preferred stock is a stock that combines the properties of stocks and bonds. Like a bond, it has a fixed dividend and a fixed buy-back price. However, the dividend is not guaranteed to be distributed like a bond, but is a profit in the company. Under the premise of giving priority to interest distribution, the trading method is the same as stocks.

The biggest difference between special shares and common stocks (English: Common stock) is that special shares have priority in issuing dividends, that is, special stock holders have priority in claiming remuneration from the company. But it lags behind creditors. In addition, special stock shareholders also have priority in receiving the liquidation money when the company goes bankrupt and liquidates. However, the order of repayment is lower than that of creditors.

However, preferred shares also have some disadvantages. For example, preferred shareholders usually do not have the right to vote when holding shareholder meetings. Moreover, if the company does not make a profit that year, the special shares may not pay the originally promised dividends. This is the biggest risk when the special shares receive fixed dividend income.

Types of Preferred Stock 

Depending on the conditions and characteristics at the time of issuance, the risk-reward characteristics may vary greatly. According to its characteristics, it can be divided into the following categories:

Perpetual/non-perpetual special stocks: Perpetual special stocks refer to special stocks with no expiration date. As long as they exist for one day, interest will continue to be paid. Non-perpetual preferred shares have a fixed expiration date.

Redeemable/non-redeemable preferred shares: Redeemable preferred shares mean that the company can buy back the preferred shares by issuing par value of $5 per share or common stock. Non-redeemable preferred shares mean that the company cannot buy back the preferred shares.

Cumulative/non-accumulable special stocks: Cumulative special stock indexes. If the company does not make a profit or does not issue dividends that year, the undistributed dividends can be accumulated until the next year. Non-accumulable special shares mean that no dividends are paid during the current period and no reissue will be issued in the future.

Convertible/non-convertible preferred shares: Investors in convertible preferred shares can convert the preferred shares into common shares. Non-convertible special shares mean that investors cannot convert them into common shares.

Can participate/cannot participate in special stocks: Investors who can participate in special stock indexes can also participate in the dividend distribution of common stocks, so they will receive common stock dividends + special stock dividends. Non-participation in special shares means only special stock dividends.

What is the return on investing in preferred stock?

The investment returns of special stocks mainly come from fixed dividends, which are usually higher than the dividends of ordinary stocks. However, the dividend rate of special stocks is not equal to the rate of return, because you also need to consider the price when you buy it, as well as whether the dividends can be accumulated, whether they can be converted into ordinary shares, whether they are recoverable and many other factors.

Generally speaking, the return on special shares will change with changes in market interest rates. When market interest rates rise, the price of special shares will fall, and vice versa. This is because when market interest rates rise, investors will seek higher-yielding investment tools and abandon low-yielding special stocks. As a result, the price of the preferred stock will fall to increase its return to attract buyers.

In addition, the rate of return on special shares will also be affected by the company's credit risk. If a company's credit rating declines or its operating conditions deteriorate, the price of preferred shares will fall because investors will worry that the company will be unable to pay dividends or buy back the preferred shares. As a result, the return on the preferred stock will rise to reflect its increased risk.

What is the difference between preferred stock and convertible bonds?

Both preferred stocks and convertible bonds are investment tools that combine the properties of bonds and stocks, but there are some important differences:

Convertible bonds are claims, while special shares are equity. This means that convertible bonds have priority in repayment rights over special shares and ordinary shares. When the company is liquidated, holders of convertible bonds can receive liquidation funds before holders of special shares and ordinary shares.

Convertible bonds have a fixed maturity date and principal repayment amount, while special shares do not. This means that holders of convertible bonds can get their principal back on the maturity date, while holders of special shares cannot get their principal back until the company buys it back or converts it into ordinary shares.

Convertible bonds have fixed interest payments, while special shares have fixed dividend payments. This means that holders of convertible bonds can receive a fixed amount of interest income in each interest payment period, while holders of special shares can only receive a fixed amount of distribution when the company makes a profit and decides to issue dividends. interest income.