Act trading preferred stock

Act trading preferred stock

Author: Provincial Jew On: 30.06.2017

A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders , and the shares usually do not carry voting rights. Preferred stock combines features of debt , in that it pays fixed dividends, and equity , in that it has the potential to appreciate in price.

The details of each preferred stock depend on the issue. Adjustable-rate shares specify certain factors that influence the dividend yield, and participating shares can pay additional dividends that are reckoned in terms of common stock dividends or the company's profits. If a company is struggling and has to suspend its dividend, preferred shareholders may have the right to receive payment in arrears before the dividend can be resumed for common shareholders.

Shares that have this arrangement are known as cumulative.

Trading Preferred Stocks: Opportunity for Generous Yield and Quality Capital Gains - Xcel Energy Inc (NYSE:XEL) | Seeking Alpha

If a company has multiple simultaneous issues of preferred stock, these may in turn be ranked in terms of priority: Preferred shareholders have prior claim on a company's assets if it is liquidated , though they remain subordinate to bondholders.

Preferred shares are equity , but in many ways they are hybrid assets that lie between stock and bonds. They offer more predicable income than common stock and are rated by the major credit rating agencies. Because preferred shareholders do not enjoy the same guarantees as creditors, the ratings on preferred shares are generally lower than the same issuer's bonds, with the yields being accordingly higher. Whether they trade at a discount or premium to the issue price depends on the company's credit-worthiness and the specifics of the issue: If shares are callable , the issuer can purchase them back at par value after a set date.

If interest rates fall, for example, and the dividend yield does not have to be as high to be attractive, the company may call its shares and issue another series with a lower yield. Shares can continue to trade past their call date if the company does not exercise this option.

Some preferred stock is convertible , meaning it can be exchanged for a given number of common shares under certain circumstances. The board of directors might vote to convert the stock, the investor might have the option to convert, or the stock might have a specified date at which it automatically converts.

Whether this is advantageous to the investor depends on the market price of the common stock.

Trading Preferred Stocks: Opportunity for Generous Yield and Quality Capital Gains - Xcel Energy Inc (NYSE:XEL) | Seeking Alpha

Preferred stock comes in a wide variety of forms. The features described above are only the more common examples, and these are frequently combined in a number of ways. A company can issue preferred shares under almost any set of terms, assuming they don't fall foul of laws or regulations. Most preferred issues have no maturity dates or very distant ones. Due to certain tax advantages that institutions enjoy with preferred shares but individual investors do not, these are the most common buyers.

Preferred stock issuers tend to group near the upper and lower limits of the credit-worthiness spectrum.

4 Quality Preferred Stocks For High Income And Risk Protection | Seeking Alpha

Some issue preferred shares because regulations prohibit them from taking on any more debt, or because they risk being downgraded. While preferred stock is technically equity, it is similar in many ways to a bond issue; some forms, known as trust preferred stock, can act as debt from a tax perspective and common stock on the balance sheet.

For more on this interesting hybrid security, read A Primer on Preferred Stocks and Valuation of Preferred Stocks. Dictionary Term Of The Day.

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act trading preferred stock

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