What are the Best Tips for Preferred Stock Investing?

Malcolm Tatum

Choosing to invest in preferred shares of stock is often a wise move, in that the shares come with certain benefits not found with common shares. Assuming that the preferred stock investing is pursued with a few simple tips in mind relating to qualifying both the short-term and long-term prospects of the company issuing the shares, and the terms and conditions connected with the investment, the holdings can yield a significant amount of return. Fortunately, many of the tools needed to manage these tasks are readily available to just about any investor.

Preferred shares are shares in a company pay out a fixed dividend.
Preferred shares are shares in a company pay out a fixed dividend.

One of the first steps to take with preferred stock investing is to identify viable stock offerings that fit the investor’s requirements in terms of the level of risk assumed and the amount of return that is generated more or less regularly by the shares. Here, the goal is to delve into the historical performance of both the issuing company and the shares currently traded in the marketplace. Ideally, the shares will carry a relatively low degree of risk while performing well in spite of economic downturns. When this is the case, there is at least some reason to anticipate that the investment will follow the same general pattern in the future.

Preferred stock investing also requires considering the future of the issuer as well as the performance of the stock. This often means taking a serious look at the goods or services offered by the issuer. If there are indications that the product line which currently generates significant profits for the issuer may be somewhat obsolete in a few years, an investor who is looking for shares to hold over the long-term may want to consider other opportunities. If the idea is to hold the shares for no more than two or three years, then sell before the market begins to drop, the shares may represent a viable investment.

Along with understanding the past, present, and future of the investment opportunity, it is also important to consider the terms and conditions related to the preferred shares. Many investors overlook this when engaging in preferred stock investing, although it can create problems later on. Specially, the idea is to make sure there is no misunderstanding about what rights and responsibilities the investor and the issuer possess in relation to the shares.

Some preferred shares will be hybrid instruments that can be converted to common shares if the issuer chooses. The preferred stock may or may not provide voting rights for investors. Schedules for dividend payments will vary, and the exact process for settling with investors in the event of asset liquidation and bankruptcy may also be slightly different. Investors should never overlook this component of the preferred stock investing process, even if past performance and projections of future returns are very favorable.

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