Many investors are aware of the vast array of options they have when selecting the common stock of a company but what about preferred stock? What are some of the key benefits and why would one choose to purchase a preferred stock? Priority - To start, preferred stock still represents ownership of an underlying company. In fact, in the event of a bankruptcy, preferred stock will have senior claim over common stock. This is just a fancy way of saying that preferred stock holders will get claim to any assets over common stock holders. For the long term investor this may offer an added level of comfort in your choice to purchase preferred stock. Preferred stock also gets priority in receiving dividends as well. Common stock holders will always be the last to get paid.
Dividends - When purchasing preferred stock one will want to note that the dividends are usually paid as a stated percentage of par (for stocks par is usually $100), or a fixed dollar amount (For stocks with no "par"). It is for this reason that preferred stock is considered a "fixed income" security. If you own any income mutual funds you will likely notice that there are preferred stocks included in the fund.
Negatives - 1) Preferred stocks usually offer no voting privileges. Although this has changed slightly over the years, a long term investor will want to assume they have no voting rights unless the company specifically says otherwise. 2) Preferred stocks are sensitive to changes in interest rates. Remember that preferred stocks can pay fixed dividends and that value is sensitive to interest rate changes.
All in all preferred stock can be a consideration for the longer term investor. As with anything else, liquidity is king so be sure that any preferred you may be looking at investing in also has others who are looking at the same issue.