Preferred stock is a hybrid investment security with features of both common stock and bonds. For investors seeking the consistent payments of bonds with the equity ownership advantages of stock, preferred stock is an appealing option.
What is the difference between stock and preferred stock?
- Preferred and common stock both give the shareholder ownership in a company. However, there are a few key differences:
- Preferred stock offers more regular, scheduled dividend payments than common stock.
- Preferred stockholders come before common stockholders in receiving payment if a company declares bankruptcy.
- Common stockholders often have voting rights that preferred stockholders do not.
- The price of preferred stock changes more slowly than common stock because, like bonds, preferred stock prices are tied to market interest rates.
- A company has greater power to recall and reissue preferred stock than it does common stock.
Ultimately, preferred stock offers more stability and less risk, while common stock has the potential for unlimited upside.
Are preferred stocks a good idea?
Whether investing in preferred stock is good or bad depends on your overall investment strategy. If you want your portfolio to have securities that provide more reliable dividend payments than common stock and better tax implications than bonds, preferred stock could be a good option. But you remember the potential cons — preferred stock doesn't have the same voting rights as common stock or the security of bonds. Those are just a few factors to consider before buying preferred stock.
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