Preferred stocks are quite different from your average common stocks and offer some special benefits that you won’t get to see in common stocks. It is these benefits that’s what made investors love preferred stocks so much. But, before we go behind the curtains, let’s talk briefly about preferred stock.
What is Preferred Stocks
Preferred stock is a class of stock that company issue after deciding to raise capital. To attract investors towards the firm, the company can either issue preferred stock, common stock or even both. By issuing stock the company provides a worthwhile financial asset to the investors to invest in the company. It allows the company to get funding as needed while for the investor it is advantageous to invest in stock to build wealth over time.
In recent years, preferred stocks have gained a lot of popularity and a lot of investors are investing in it.
One thing is clear, it is beneficial to invest in preferred stocks otherwise, investors won’t show this much of interest in it, right?
Why investors love preferred stocks?
An investor to the company who invested in common stock can vote on major & minor corporate issues, make profits out of fluctuation in share prices, and receive dividend payments. But, when it comes to preferred stocks, an investor will not only have the ownership in the company but also receives pre-defined dividend payments whether the company is making any profit or not. It doesn’t matter!
Even the dividend amount will be higher than the dividends received by the common stockholders. Furthermore, if by any chance, the company goes bankrupt in the future then the preferred stockholders will get his/her money back long before the common stockholders, creditors but after bondholders. So, once the bondholders have been made whole, you will be the first to be paid by the company.
Like common stockholders, they won’t be last to get their money back. Preferred stock
is like a better version of equity and bond. It offers timely high dividend payments and better stability in cash flows.
There are some other benefits that not well-known to all and vary from company to company – is that a preferred stock sometimes may include an optional clause that allows the company to buyback shares to convert into common shares at a predetermined price.
If we talk about the volatility level then common stocks are more volatile in nature than preferred stocks. So, it is possible that you may not see large gains as common stockholders can. But, the good thing is preferred stock has little or no effect on the stock price however the common stock-prices start soaring.
Now it is clear to understand why so many investors start going crazy about preferred stocks. And now after discussing it, it is clear that preferred stocks have a certain advantage over common stocks.
Hope, this article helped in understanding of ‘Preferred stocks’ helped you clear your doubts. Nevertheless, if you have any query then don’t forget to mention in the comment section below,