Last time, we discussed the difference between a common stock and a preferred stock. Now,
we’ll be tackling the second type of stock.
Preferred Stock
Definition: This stock
represents the part of the company’s capital that carries preferential right, to be
paid, when the company goes bankrupt. It’s also a more stable investment
vehicle.
A preferred stock is a type of ownership, that has higher
claim on a company’s assets and earnings than a common stock. Usually, a
preferred share will have a dividend that needs to be paid to common
shareholders before dividends. Aside from this, owning a preferred stock will
not give you any voting right.
Preferred stocks are generally a combination between
features of debts and equity. It pays fixed dividends and has the potential to
increase in price. The details of preferred stock you own will actually depend
on the issue.
As was stated before, when owning preferred stocks you will
have greater claim on the company’s assets and earnings. This is true during
the good times when the company has excess cash and has decided to distribute
money to you investors. During these times, owning a preferred stock can work
in your advantage since you will be paid before the owners of common stocks.
This claim will actually work best in your favor during
instances of insolvency. Common holders are and always placed last in line for
claiming the company’s assets. This means that when the company needs to
liquidate and pay all creditors and bondholders, you will be receiving the
payment before any of those common stockholders get ahold of theirs.
The dividends you will receive as a preferred stockholder is
different and usually greater than those of common stockholders.
Buying a preferred stock will give you the idea of when to
expect the dividend because they are paid at regular intervals. This means that
the stocks you own will typically move away from fluctuations, at least not as
often as common stock fluctuate. Also, if the company misses one payment, it is
required to pay it to you before any future dividends are paid on either stock.
To determine the dividend yield, you have to divide the
dollar amount of a dividend by the price of the stock, mostly based on the par
value before the stock is offered to you. Usually, it will be calculated as percentage
of the current market price after trading begins.
Trading can benefit you in
ways that can help you prepare for the near future or retirement. Here in FSMSmart, we will help you stay updated on the
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