Preferred Stock

• Preferred stock represents ownership in a company, but it doesn't generally offer the profit potential of common stock. Instead, preferred stock offers a guaranteed regular dividend that is not tied to the performance of the common stock in the stock market. However, the guarantee is only as reliable as the financial strength of the company. Preferred stock also doesn't offer the right to vote on company resolutions, as common stock does.
  
  

Call Features

• A call feature is a provision that allows a company to purchase shares back from investors at a specified time and price. Usually, a call feature is an optional feature that can be exercised at the discretion of the company, rather than a mandatory payout date such as a bond maturity date. A call provision is normally a safety net for a company, allowing it to redeem high-interest-rate preferreds if interest rates fall. For example, a company might issue a preferred stock with a dividend rate of 10 percent and a call date five years in the future. If interest rates fall in five years, and a company can issue preferred shares paying only 4 percent at that point, the company will most likely call the existing preferred so that it can issue less-costly shares.
  
  

Place in Corporate Capital Structure

• If a company goes bankrupt or otherwise dissolves, then any available funds are paid out to shareholders according to their place in the company's capital structure. Bondholders are first in line, followed by preferred and then common stock shareholders. As a result, preferred stock is considered to be senior to common stock.
  
  

Trading

• Some preferred stocks have their own symbol and trade on a stock exchange, much like common stocks. However, many preferred stocks are not exchange-listed and are traded only by bond and preferred-stock trading desks. Preferred stock is usually much less volatile than common stock, and as an interest-bearing security it is more susceptible than common stock to moves in interest rates.
  
  

Risks

• Risks to redeemable preferreds include interest rate risk, market risk, financial risk and call risk. As interest rates move higher, existing preferred stocks generally trade down in value, as more attractive, higher interest-paying preferreds become available in the market. Preferred stocks that trade on an exchange are subject to the vagaries of supply and demand, as are common stocks. The financial strength of the company is also a risk for preferred holders, as the dividend on preferred stocks depends on the company being profitable enough to pay the dividend. The call feature of redeemable preferreds could allow the company to purchase your high-rate preferred at a time when only lower interest rates are available for reinvestment.