Preferred Stock

Preferred stock combines many features of common stocks with those of bonds. Like a bond, a preferred stock pays a stated dividend rate, generally twice a year. Like a stock, preferreds represent ownership in a company. Some preferred stocks trade on a stock exchange, but others trade like bonds in the over-the-counter market, on bond trading desks. As a preferred stock pays a fixed dividend, the value of the preferred generally fluctuates in line with current interest rates.

Convertibility

Call Features

A call feature is a provision that allows an issuer to redeem a security at a specified price on a specified date or later. For example, a company may issue a preferred stock with a five-year call provision at $25, allowing the company to purchase your preferred from you for $25 per share at any time more than five years in the future. A call feature is a way for a company to protect itself from paying a high rate of interest for too long. If a preferred stock pays a 10 percent dividend, and interest rates fall to the point where the company can issue new preferred stock paying just 3 percent, then it would be in the company’s best interest to redeem the 10 percent preferred stock and issue the new 3 percent stock.

Rank in Capital Structure

References

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