A preferred stock valuation is a strategy involving the determination of the fair market value of the shares currently held. This is normally accomplished by utilizing formulas that allow for shifts in a number of different economic factors and the potential impact of those factors on the price per share of the stock under consideration. There are a number of different approaches that are used, each of them allowing for the fact that preferred shares are different from common shares, in that the investment is an equity investment that has priority over shares of common stock in certain situations.
The process of preferred stock valuation allows for the understanding that this type of stock is actually a hybrid instrument that shares some of the features associated with both shares of common stock and debt. This special equity security typically has precedence over common shares when it comes to issuing dividends in certain situations such as when a company is undergoing financial difficulties or has been acquired by another business entity. Allowing for events of this type is common to the valuation process, although most analysts prefer to focus more on potential events that are highly likely to occur in the future, rather than events that have some remote possibility of taking place.
A number of methods commonly used in stock valuation in general are helpful with a preferred stock valuation. Among these are the Gordon model, the P/E method, and the discounted cash flow method. Choosing the most appropriate method is important, since the accuracy of the valuation will be affected based on the relevance of the method used in light of the current status of the shares and what is likely to occur with their value in the future.
In terms of protecting the value of an investment portfolio, the preferred stock valuation is an important tool in helping investors decide whether to hold onto the shares, attempt to secure additional shares, or to sell off the shares within a specified period of time. Making the right decision regarding those shares makes it possible to minimize losses while at the same time positioning the investor to generate additional returns based on what is most likely to occur with the stock within that particular time frame. For this reason, conducting a preferred stock valuation both prior to purchasing the shares and also during the ownership of the shares from time to time is a wise move on the part of any investor.