One of the investment models that is very familiar to those who actively manage investment portfolios in capital markets is preferred stocks. This type of stock generally has some priority rights that are different from common stocks.
However, in addition to these rights, there are also some limitations within the scope of preferred stocks vs common stocks. Investors who especially want to minimize the risk factor prefer stock types that provide regular dividend income due to the fixed income advantage.
Investors who have diversified their investment portfolio through preferred stocks gain the right to receive regular dividends from the periodic profit shares of companies. Within the scope of preferred shares explained, let's examine the positive aspects and risk factors of this investment vehicle as one of the most common stock types.
What Are Preferred Stocks?
Preferred stocks are one of the popular stock types where investors receive fixed and periodic dividend income and are given the right to receive priority shares in possible crisis situations.
For example, if a company that has offered its shares to the public goes bankrupt after a certain period of time, preferred stock owners are on the priority payment list over common stock owners.
This priority is a critical feature for investors who care about risk management. Preferred stock owners generally do not have the right to vote in periodic meetings of companies and in determining strategies.
To put it simply, it is possible to obtain regular returns thanks to these stocks and it is the right investment tool within the scope of investing in preferred stock for beginners. With BlueSuisse, you can manage the "investing in preferred stock for beginners" process digitally in the easiest way.
Key Features of Preferred Stocks
If the "Features of preferred stock" were to be explained simply for Beginner level investors, it can be listed as follows:
- Fixed dividend income: Investors receive dividend income parallel to the amount of shares purchased from the companies' profits each year
- Dividend priority: In case of possible bankruptcy, they have the right to receive income before common stock owners
- Voting rights: Preferred stock owners generally do not have voting rights, but sometimes a limited voting right may be offered.
Thanks to these elements, investors can experience many advantages within the scope of "benefits of owning preferred shares". To learn more about preferred shares and the stock market, open a demo account in BlueSuisse now!
Types of Preferred Stocks Explained
There are many different types of stocks in the stock markets. Investors should determine the most suitable one for their own risk tolerance.
The most popular types of preferred stocks can be listed as follows:
- Cumulative
- Non-Cumulative
- Convertible
- Participating
- Callable
Investors can choose the one that suits them best from these different preferred stock types according to their risk-return balance expectations. For example, convertible stocks can usually be easily converted into common stocks.
This flexibility can be useful for beginner level investors. Cumulative preferred stocks, where unpaid dividends accumulate from time to time, can also be a good choice. You can start your reliable stock market investment processes through BlueSuisse.
Preferred Stocks vs. Common Stocks
The most popular stock types on capital stock exchanges are preferred vs common stocks. These two popular stock types offer investors different features in some aspects.
In terms of dividends, portfolios managed through preferred stocks have the privilege of fixed and priority dividend income. However, it can be variable for common stock owners.
Voting rights are a feature with limitations for preferred stock owners and, like common stock owners, they are not given the right to vote in the management of every company.
While the risk is generally lower when managed through preferred stocks due to the fixed return opportunity, the risk factor is slightly higher for investors managing common stocks.
While common stock owners do not manage a portfolio that can be easily changed to a different stock type, these stock types generally offer convertible solutions.
When these differences are evaluated within the scope of "difference between preferred and common stock", it will be understood that different stock types are more suitable for different investor profiles.
Pros and Cons of Preferred Stocks
The features that can be considered beneficial for investors within the scope of pros and cons of preferred stocks can be listed as follows:
- Offers fixed dividend income
- Priority is given to other stockholders in situations such as liquidation
- Safe investment management thanks to low volatility
- Some types are convertible, which provides flexibility to investors
In addition to these, some disadvantages can be listed:
- No voting rights
- This investment model does not offer a good protection method against inflation
- Potential return is more limited than other investment instruments and may not turn into a very large return in the long term
- Contains callable risks
These disadvantages should be taken into consideration by investors within the scope of risks of buying preferred stocks. You can start your investor story with BlueSuisse, an online forex and stock market platform, wherever you are in the world.
Who Should Consider Buying Preferred Stocks?
In the context of Investing in preferred stocks for beginners, the questions "who should be interested in preferred stocks and for which investors is it suitable" are important.
Generally, preferred stocks are the right investment tools for investors who want to discover low-risk investment instruments, those who care about fixed income, and investor profiles who aim to diversify their institutional portfolios.
Preferred stocks are not enough for aggressive investors who dream or plan high returns.
The following investor profiles are generally more interested in preferred stocks when managing their investment portfolios:
- Those who want to obtain fixed income
- Those looking for low volatility
- Investors looking to minimize risk factors
The probability of large returns in the long term is higher in portfolios managed through common stocks. Therefore, these stocks may not be a suitable investment instrument for plans such as higher returns with less investment.
Can You Lose Money on Preferred Stock?
As with every investment model, portfolios managed through preferred stocks also contain risks from different perspectives and the possibility of losing money should always be taken into consideration for investors.
When the experiences of professional investors in today's markets are analyzed, the following common risks of buying preferred stocks can be listed as follows:
- In possible bankruptcy cases, you may risk losing your dividends and principal
- There may be a risk of early payment in callable shares
- There may be a loss of value if interest rates increase
- Dividends may be suspended from time to time in crisis situations
However, such situations generally occur in extraordinary market conditions and investors should research the financial statements of the companies listing their shares when investing and have sufficient information within the scope of preferred shares explained.
Thanks to BlueSuisse, you can also evaluate different asset classes together with diversification strategies in your investment projects in your portfolios. Open your live trading account now in just a few steps.