What is Callable Preferred Stock?

Callable preferred stock is a type of investment that includes terms and conditions which allow the issuer to call and retire the shares of stock if and when certain events in the marketplace or other specified conditions should take place. Sometimes referred to as redeemable preferred stock, this form of stock may be called as part of a court-ordered asset liquidation of the issuing company. The stock may also be called as part of an attempt to avoid a hostile takeover, essentially eliminating the possibility of the corporate raider gaining control of those shares. Since governmental regulations regarding the structure and issuance of callable preferred stock vary from one country to another, it is important to understand that the reasons why the stock may be called will differ between nations.

With callable preferred stock, the issuer has the ability to call the stock when certain conditions or events come to pass. Generally, the terms and conditions associated with the initial purchase of the shares will identify a unit price that must be paid for the shares, regardless of their current market value. Typically, this unit price is more than the value of the shares when they were first issued, making it highly likely that the investor will at least recoup his or her initial investment, but without any guarantees of earning anything above and beyond that amount.

Once the shares of callable preferred stock have been called and redeemed by the issuer, they are usually retired. The process is not considered complete until compensation has been tendered to each holder of the callable stock and the shares are considered fully redeemed and out of circulation. This means that the shares are not eligible for sale to new investors. In a sense, the shares cease to exist once the issuer has redeemed them.

It is important to note that while the provisions of callable preferred stock do allow the issuer the right to call and retire the shares under certain conditions, that does not mean that this right will ever be exercised. The shares could remain in circulation for a number of years, generating returns for the holders, without any events taking place that prompt the issuer to take this sort of action. As with any type of investment, investors who wish to purchase callable preferred stock should consider the past performance of the issuer, the current financial condition of the company issuing the shares, and use all available data to project how the shares will perform in the marketplace in the future.