Advantages and Disadvantages of Preferred Stock
Preferred stock offers several advantages and disadvantages when compare to common stock. It gains its name for the fact that it takes priority over common stock dividends are to be paid. In other words, preferred shareholders will also take precedence over common shareholders in the event a company is liquidated, however, they will not take precedence over creditors. From ...view middle of the document...
In addition, the interest yield of preferred stocks is known for being less volatile than bonds. An important drawback of most preferred stocks is that they do not provide voting rights for the shareholder.
In many ways, a preferred security works like a hybrid of a stock and bond. The face value of the asset is not going to fluctuate very much, thus leaving out the possibility for a windfall profit. In exchange, the holder of a preferred security will enjoy a steady stream of guaranteed dividend payments. It also provides the peace of mind knowing that your claims to assets will have priority if the company ever goes bankrupt.
As an investment, I would choose common stock. Although the risk can be higher, there is a greater potential to experience a very large profit. If I was a significant shareholder in a company, I would choose common stock because it provides voting rights that can be used to vote on corporate affairs. This provides the shareholder with the ability to have influence over corporate affairs. Ideally, a diversified portfolio will contain a variety of common and preferred stocks spread out the risks and rewards evenly.
