What is preferred stock ？

Preferred stock, also commonly referred to as preference shares or simply "preferreds," is a form of equity traded on the stock market. While it shares similarities with common stock, it also exhibits characteristics of bonds, making it essentially a hybrid security that combines features of both stocks and bonds.

Characteristics of preferred stock:

Fixed dividend rate:Preferred stock typically enjoys a fixed dividend rate, where holders can anticipate receiving a predetermined amount of dividend payment at specific intervals (usually quarterly). This dividend is a fixed amount calculated by multiplying the issuance face value by the dividend rate, providing investors with a stable source of income.
Preferred dividend payment priority:Preferred stock typically carries the privilege of preferred dividend payment, whereby holders are prioritized over common stock shareholders when dividends are distributed.
Fixed issuance face value: Typically, preferred stock is issued at a set price of $25 per share, and the issuing company is obligated to repurchase the preferred stock at the same price to ensure that investors holding until maturity do not incur losses due to price differentials. However, the price of preferred stock purchased in the secondary market may not necessarily be fixed at $25 per share. Therefore, it is generally advised for investors to avoid purchasing preferred stock above the issuance price to reduce redemption risks.
Convertibility: Depending on the terms of issuance, some preferred stocks can be converted into common stock. These convertible preferred stocks usually offer a relatively lower fixed interest rate. However, if the company's stock price rises above the originally set conversion price, investors can profit from the conversion. Nonetheless, not all preferred stocks are convertible, so investors need to be mindful of whether this feature is present when selecting preferred stocks.
Redeemability: Some companies grant the right to redeem stocks from the market after a predetermined period. Redeemable preferred stocks can be repurchased by the company according to the redemption terms attached at the time of issuance. The issuing company repurchases the stocks at the issuance price plus a certain percentage of compensatory yield, allowing investors to profit from it. However, not all preferred stocks are redeemable, so investors need to consider whether this feature is present when selecting preferred stocks.

What are the types of preferred stock?

Some common types of preferred stocks include:

Cumulative/Non-Cumulative Preferred Stock	Convertible Preferred Stock	Callable Preferred Stock
Investors holding cumulative preferred stock have the right to accumulate unpaid dividends when dividends are not paid. Once the company has sufficient funds, it will pay the accumulated dividends to them. In contrast, investors holding non-cumulative preferred stock do not have the right to accumulate unpaid dividends when dividends are not paid.	Investors holding convertible preferred stock have the right, under certain conditions, to convert their preferred stock into the company's common stock.	The issuing company has the right to redeem preferred stock from the market after a specific period, typically at a certain premium price.
Preferred Preferred Stock	Fixed Rate Preferred Stock	Cumulative Redeemable Preferred Stock
This is a type of preferred stock that holds higher priority compared to common preferred stock, typically occupying a superior position in the capital structure, and enjoying greater privileges and advantages.	This type of preferred stock has a fixed dividend rate, with dividend payments calculated and disbursed according to a fixed interest rate.	This type of preferred stock possesses both cumulative and redeemable characteristics, meaning holders have the right to accumulate unpaid dividends and the company has the right to redeem these shares from the market at a predetermined time.

These are some common types of preferred stock, and there may be variations and additional types based on different financial needs and company structures.

Advantages of Preferred Stock Investment

Fixed Income: Preferred stocks typically offer a fixed dividend rate, providing investors with a stable income source similar to bonds. With characteristics resembling fixed dividends and principal redemption, preferred stocks can be classified as fixed-income investment instruments, offering stable returns to investors. Additionally, the fluctuation in stock prices is lower compared to common stocks.
Lower Default Risk:Companies issuing preferred stocks often have robust profit capabilities and cash flow positions, and most companies have investment-grade credit ratings, thereby reducing default risk. However, investors should conduct thorough analysis of the company's profit status and debt repayment capabilities before investing to ensure the rationality of investment decisions.
Principal Guarantee Upon Company Redemption:Preferred stocks typically have a non-call 5-year provision, meaning that after 5 years of issuance, the issuing company has the right to redeem the preferred stock at $25 per share. Similar to bonds, as long as investors purchase at a reasonable price and the company does not go bankrupt, preferred stocks inherently provide capital protection, offering investors a certain level of risk assurance.
Portfolio Diversification: Preferred stocks can serve as a diversified asset in an investment portfolio, helping investors to spread risks and balance their investment portfolios.

Risks of Preferred Stock Investment

Dividend Non-Payment Risk: In case of a company's lack of profitability or poor earnings, preferred stocks may not pay dividends as originally promised, resulting in investors not receiving the expected fixed income.
Early Redemption Risk: Preferred stocks usually contain early redemption clauses, where the issuing company has the right to redeem the stocks at a predetermined price after a specific period. Investors may need to reallocate funds in unfavorable market conditions and may not continue to enjoy the original fixed income.
Interest Rate Risk:The dividends of preferred stocks are typically fixed. When market interest rates rise, the fixed interest of preferred stocks may lose competitiveness, leading to a decrease in their prices.
Market Price Fluctuation Risk: The market price of preferred stocks is influenced by various factors such as market sentiment and company performance, leading to significant price fluctuations.
Priority Change Risk: In the event of a company's bankruptcy liquidation, although preferred stocks are prioritized over common stocks in asset distribution, their priority may be affected by creditors or other debt priorities, posing a risk to preferred stockholders in fully safeguarding their investment principal.

Therefore, when considering preferred stock investment, investors should weigh the risks and returns and make appropriate decisions based on their investment objectives and risk preferences.

Common Stock vs Preferred Stock:

Comparison Items	Common Stock	Preferred Stock	Detailed Explanation
Voting Rights	Yes	No	Common stock shareholders have voting rights in the company, allowing them to participate in corporate decision-making. Preferred stock (also known as preference shares) typically does not grant voting rights, thus making them relatively passive in company decision-making.
dividend distribution	Volatility is high.	usually fixed	Common stock dividends typically vary based on the company's earnings and exhibit significant volatility. Preferred stock dividends are usually fixed and can be either cumulative or non-cumulative. Cumulative preferred stock allows unpaid dividends to accumulate and be paid out in subsequent years.
Order of liquidation	Afterwards.	Priority	In the event of bankruptcy liquidation, preferred stock (also known as preference shares) shareholders have priority over common stock shareholders. This is because preferred stock combines characteristics of bonds and common stock, allowing preferred stockholders to receive distribution of remaining assets before common stock shareholders.
Early redemption	No	Yes	Preferred stock (also known as preference shares) typically features early redemption, where the issuing company can redeem the preferred stock at its face value (usually $25) after a specified date. In contrast, common stock does not have provisions for early redemption.
Convertibility	No	Yes	In preferred stock (also known as preference shares), there exist convertible and non-convertible types. Due to the typically lower liquidity of preferred stock, there is a risk of difficulty in selling, hence convertible preferred stock allows shareholders to convert it into common stock, reducing liquidity risk. In contrast, common stock does not require such conversion.
Liquidity and Price Volatility	High Liquidity, High Price Volatility	Low Liquidity, Low Price Volatility	Common stock generally exhibits good liquidity in the market, but experiences significant price volatility, influenced significantly by market factors. Preferred stock, on the other hand, has relatively poor liquidity due to its lower quantity and the fact that many investors view it as a fixed-income instrument. Consequently, it tends to have lower price volatility.

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