* Deemed a “senior” security because it has priority over common stock.
* Receive dividend before common
* Paid before common if company liquidates
* Typically issued at $100 par with a stated dividend rate
* Typically paid semi-annually
* Ex. 10% -> $5 every 6 months
* Dividends are a fixed amount
* Recently have been issuing preferred stock at $25 & $50
* Makes a round lot (100 shares) more affordable
Interest Movements and Preferred Stock Prices
* When preferred are issued, the dividend rate is comparable with the market rate of interest at that time
* Current Yield = Annual Income from Security/ Market Price
* If interest rates increase it decreases the preferred stock price and vice versa
Preferred Stock Features: Cannot vote
* No preemptive rights (because issuance shares doesn’t dilute holdings)
* Preference to dividend distributions & company assets
* Difference between BONDS and PREFERREDS
* Bonds mature, Preferred indefinite life
* Bondholders have priority of claim to interest payments and assets upon liquidation
* Bondholders have a legal right to interest payments; preferreds only pay if the BOD declare it
* If issuer omits a dividend payment it accumulates and are paid if possible. Accumulated preferred dividends must be paid to pay common dividend
* Issuer has the right to “call in” the shares after a set date. Issuers will call the shares if interest rates fall. Once called now new preferreds can be issued at a lower interest rate.
* Preferred shareholder can convert his shares into common based upon a predetermined price. In this case holders can enjoy capital gains is the stock price increases.
* Conversion Ratio
* Conversion Ratio = Par/ Conversion Price
* Parity Price
* If the stock price rises above...