Preferred stocks gained a lot of popularity in recent years. Preferred stocks are more like a combination of stock and bond. “Preferred stocks” are not like your average common stocks and have several quite special benefits in comparing to common stocks. This is one of the reasons why many investors are interested in preferred stocks.
So, let’s talk about what exactly preferred stocks is. Well, for starters, as you know that “a stock” refers to equity or ownership in a firm. And the shares of a firm come in two different classes: preferred stock and common stock.
When a company decides to raise capital by attracting investors towards the firm, it does so by issuing stock. This issuance is either in common stock or preferred stock. Sometimes, in both!
But stocks are worthwhile financial assets for investment. But, to an investor one can be much advantageous to invest in than another. Here, we’re going to discuss why preferred stocks are loved by investors.
Why is it beneficial to invest in preferred stocks?
So, let’s check this out why investors love preferred stocks.
Common stocks are stocks what most of us think about what they are. An asset that enables investors to get to vote on corporate issues, make a profit through rising prices, and dividend payments. But, preferred stocks are slightly different. It also shows the investor’s ownership in the company but slightly different.
For instance, the preferred stock pays a pre-defined dividend no matter whether a company is making any fortune or not. However, the dividends in common stocks are mostly varying with the company’s revenue and profits. Also, the dividends on preferred stocks are higher than the dividends on common stocks.
If by some chance the company goes bankrupt, investors who are invested in common stock are last to get their money back – after creditors, bondholders, and preferred stockholders.
The higher dividend and peace of mind attract investors more toward the preferred stock. Like we said earlier, preferred stock is a combination of equity and bond. So, it offers high dividend payments and better stability in potential cash flows.
There are some other benefits that only a few investors are aware of – based on the company to company – is that preferred stock may contain an optional clause that enables the company to buy back the shares at a predetermined price or to convert preferred into common stock.
So, there is no way you would resist investing in preferred stocks. If it is complicated for you to understand then you can check the company’s prospectus to see if there is an optional clause for preferred stock or not.
Hope, this article helped you in a way you expected it to be. Nevertheless, if you have any query regarding the preferred stocks then don’t hesitate to mention in the comment section below.
Nisha Sharma contributed this post guest. She is a professional blogger.