What is "preferred"?

Preferred stock represents equity in a company and often carries rights that take precedence over common stock in dividends and liquidation. While voting rights are usually limited, there may be voting rights in specific situations such as non-payment of dividends, or separate consent rights. The articles of incorporation and issuance terms are the standard.

Upon liquidation, remaining assets are generally distributed after creditors are paid, in the order of preferred stock then common stock. If assets are insufficient, preferred shareholders may also suffer losses. This is not a product with deposit protection or a guaranteed principal at maturity.

Even if it looks like a fixed interest rate, payment guarantees vary.

There are structures such as fixed dividend rates, floating dividend rates, and dividend rates that reset at certain points. In cumulative types, unpaid dividends accumulate according to the contract, while in non-cumulative types, unpaid dividends may not remain as a claimable right later.

The stated dividend rate may be based on par value or the liquidation preference amount and differs from the yield based on the current market price. "6% preferred stock" does not mean it guarantees 6% of the amount you currently paid. Check the company's financial capacity and payment declaration terms.

Call risk: You may have bought it at a high price, only for it to be redeemed at a lower price.

A call is the right for a company to redeem preferred stock under specified conditions. It is different from the right for an investor to demand the return of principal whenever they want. If a company redeems when interest rates fall, you may have to reinvest at a lower yield.

If preferred stock purchased at 27 dollars is called at 25 dollars per the contract, you may incur a price loss of 2 dollars even after receiving dividends. Consider not only the current dividend yield but also the yield-to-call, which reflects dividends and price differences until the call date, as well as the call date itself.

Interest rate, credit, and conversion risks

The fixed dividends of long-term or perpetual preferred stock may face downward price pressure as their relative appeal decreases when market interest rates rise. Credit deterioration and low trading volume also affect price and liquidity.

Check the conversion ratio, deadline, and mandatory conversion conditions for convertible preferred stock. The ability to convert does not guarantee unlimited upside potential. Perpetual types may not have a maturity date, so you could hold them for a long time if the company does not call them.

Series and disclosures over ticker suffixes

Notations like p, Pr, Pref, -P, or /P vary by exchange and brokerage. Even within the same company, dividend rates, calls, seniority, and conversion terms can differ by series. Do not assume you are ordering the same security just because the name is similar to common stock.

The certificate may be a depositary share representing a fraction of a preferred share. Distinguish this from an ADR, which represents foreign common stock. Read the security description and prospectus to confirm the exact type of security and ratio.

Check what you have read.

• Have you checked whether it is cumulative or non-cumulative?
• Have you checked the call date and redemption price?
• What are the fixed, floating, and conversion terms?
• Are the series and certificate ratio correct?

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