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What is a Preferred Stock - Preferred Stocks 2018 - YouTube
Channel: Learn to Invest - Investors Grow
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today we're going to look at preferred
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stocks we are also going to look at
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three risks to consider when investing
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in preferred after we go over the three
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risks I'm going to bring out one very
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important point we should consider when
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investing in preferred stocks okay let's
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get started so what is a preferred stock
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imagine stocks and bonds got together
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and had a baby that baby would be a
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preferred stock preferred stocks have
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features of both stocks and bonds they
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are similar to bonds because they
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generally pay a fixed dividend amount
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for example let's pretend a company
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issues a preferred stock that preferred
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stock is going to cost the investor $25
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and let's assume that the company
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declares that this particular preferred
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will pay a $1 dividend each year that
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means that this preferred stock will
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have a 4% dividend yield a dividend
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yield is calculated by dividing the
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annual dividend by the price of the
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stock so here would be $1 divided by $25
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now if you're familiar with bonds you
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will see that this is a very similar
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concept if you're not too familiar with
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bonds watch our bond investment video
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which I'll leave in the link below so
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functionally the dividends of preferreds
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work very similar to bonds but they are
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also similar to stocks and that owning a
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preferred share also represents
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ownership in the company just like
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stocks do preferred shares have the
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advantage of a common and that they are
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higher up in the pecking order what do I
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mean by that if the company every one
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bankrupt the assets of the company would
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be sold off and the investors would get
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paid first the bond investors get paid
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then preferred investors get paid and if
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there's anything left common
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shareholders would be paid on the flip
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side one disadvantage of owning
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preferreds is that preferred
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stockholders do not get any voting
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rights like common shareholders do this
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brings us to our three risks to consider
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when investing in preference first if a
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company ever faced financial trouble
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before they caught the interest payments
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to bondholders they're going to cut the
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dividend payment for preferred
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shareholders
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there's a certain type of preferred
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called a cumulative preferred
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accumulative preferred means that if a
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company skips a dividend payment owed to
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the preferred shareholders they must
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make it up before they pay any common
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shareholder dividends a second risk is
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low trading volume if you ever wanted to
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buy or sell a lot of preferred shares
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you could run into trouble because there
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may not be many available and you may
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end up being forced to pay a slightly
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higher price a third risk is rising
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interest rates so in our example we paid
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$25 for a preferred that paid a 4% yield
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or one dollar a year that 4% will always
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be that way because you paid $25 for
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Bloods imagine rates rise and now is
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easy to buy a different investment that
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paid let's say a 6% yield many people
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are likely to sell their preferreds and
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reinvest it in something that pays a
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quote better dividend this is likely to
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drive the price of the preferred lower
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at the start of the video I mentioned
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that there was an important
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consideration when it comes to preferred
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investing and that is be aware of the
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type of companies that issue prefers the
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majority of preferreds come from
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companies in the financial sector now
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this is important to know because if
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you're trying to build a portfolio and
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you allocate a portion of your portfolio
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to preferreds and then allocate a
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separate portion to the financial sector
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you need to be aware that many of the
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risks involved in investing in the
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financial companies will likely hold
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true for the preferred investments as
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well if you have any questions about the
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world of investing any suggestions on
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videos please post in the comments below
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and please subscribe as we continue to
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update with new videos every week thank
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you
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