Preferred Stock

Preferred stock is stock that acts a lot like a bond but confers an ownership stake in the company. Preferred shares typically pay a fixed dividend and give their holder a claim to earnings and assets prior to that bestowed by common stock. In general, the higher the preferred yield, the greater the risk. Also, preferred yields can be cut, whereas a company can't simply decide not to pay its bondholders (unless it relishes the notion of default). Preferred stock often comes with a conversion clause permitting it to be traded in for common shares; in such instances, look at the conversion premium, or gap between the conversion price and the market price of the common. Too large a gap means limited appreciation for the preferred, and little chance of conversion in the near future. Preferred stock tends to be bought by institutions rather than individuals. The latter can conveniently invest in such issues through a mutual fund specializing in convertible securities.



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