In this lesson, Students learned about the fundamental aspects of preferred stock. Although Preferred shares are a proportional ownership of equity in a company, the security performs more like a bond. Although all preferred shares operate differently, we can general agree that the value of a preferred share is solely based on the financial health of the company issuing the stock and the dividend rate. Unlike common shares, when a company has increased earnings and growth, the preferred stock won't change in market price. The price of redemption for a preferred share is the face value, not a premium or discount from the book value.
Before purchasing a preferred share, we learned it's very important to review the certificate of designation. This document provides the investor the with all the specific information about how the preferred share operates. Some key things to consider are the following:
Cumulative preferred Vs. Non-Cumulative Preferred
Perpetual term Vs. a designated term
The Calculability of the preferred stock
the Adjustability of the interest rate