Preferred Stocks Disadvantages

Despite their name, preferred stocks are less preferred than common stocks. Preferred stocks represent a type of stocks issued by companies as complementary to common stocks.

Preferred stocks represent more of a hybrid security. It is of a fixed income character and has some special rights and features as its name implies.

Preferred Stocks Dividends

Stocks are characterized by the fact that companies pay dividends on them. As for preferred stocks, they have a priority over common stocks when dividend paying time comes. Additionally, preferred stockholders have a priority over the other shareholders for the assets of the company in case of liquidation.

On the other hand, preferred stockholders are deprived of voting rights on corporate matters. Additionally, the price of the preferred stocks doesn't appreciate in the same fashion as the price of common stocks.

Preferred Stocks Disadvantages

Despite their benefits, preferred stocks have their limitations. For instance, some of the preferred stocks are callable. This means that the company can call it at its own discretion and purchase it back. Companies call them usually when interest rates in the market decrease. As a result of the call, you will be paid your money. However, you will usually have to reinvest the money at lower rates.

Another drawback of preferred stocks is that they are subject to different restrictions and qualifications that are imposed by the company that issues the stocks.

Preferred stocks have their tax implications as well. So, before embarking on the investment in such, refer to your tax advisor.

Why Invest in Preferred Stocks

We don't highly recommend the investment in preferred stocks. Even bonds represent better alternative since income is guaranteed by the mere nature of the bonds.

Additionally, companies are not obliged in any way to pay their shareholders dividends. This means that the board of directors may decide not to distribute profits if there is a need for the financing of a company's project.

Preferred stocks offer some advantages to their holders, but their drawbacks far outnumber them. So, unless you have firmly decided that a particular preferred stock exactly meets your financial goals, you should go for one of the many other investment alternatives on the market, such as high quality bonds, money market funds and etc.

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