What is preferred stock?
Preferred stocks commonly known as preferred shares represent ownership in a corporation. This is another type of stock investors can buy from a company besides common stock.
Owners of preferred stocks have a higher claim on assets over common stocks during bankruptcies. Furthermore, preferred stock owners are prioritized when it comes to dividends.
How preferred stock work?
When you own preferred stock, you will pretty much have no rights in the voting of the corporate policies and electing the board of directors.
However, you will receive a lot of dividends which are usually paid quarterly. The dividend and profit distribution will be your regular income. your company must be profitable in order to give dividends.
Should the company you own go bankrupt? You will have rights to the company assets before common stockholders. This means that after the liquidation of the company, all debtors and bondholders will be paid in full before you get paid. If there still payments available, you will be the next one on the list.
Corporations can sometimes suspend dividend payments due to financial difficulties. If this happens, your will be paid first once your company resumes dividend payments. You must have cumulative preferred shares for this to happen, according to Dividendinvestor.
Should I invest in preferred stock?
The types of investment you will make will depend on your desired return from that investment.
If you want regular returns in the form of dividends, preferred stocks could be a good option. That means you will receive your payments every quarter (most of the time).
You can either use these dividends to cover your financial needs or reinvest them in other dividend stocks to grow your portfolio.
However, if you have interests in a long term game, electing the board of directors, and vote in the corporate policies, you may want to investigate common stock. This type of stock will give you a chance to be more active in the company.
The disadvantages of preferred stocks
You probably know what you will be losing by now if you choose to have preferred stocks.
You will not have rights of electing shareholders or voting on corporate policies.
There is no guarantee that your dividends will stay the same. In other words, dividends you receive depend on the profitability of your corporation.
Sometimes companies go through a restructuring phase especially when they are not doing good financially which can result in a reduction of dividends.
