Preferred stock is one of the two types of stock that is issued by corporations seeking to bring in capital. As with common stocks or with bonds, the money that is received from the sales of these shares goes into the company coffers in return for the issuance of the shares to the shareholders. Although preferred stock does share similarities with common stock, its basic characteristics make it fundamentally different security. Preferred stock is designed to function as a fixed-income security, primarily. Common stock is normally considered to be a method for long-term growth that often does not deliver an income stream on a regular basis the nature and purpose of preferred stocks offers shareholders several unique advantages when compared to other investments.
Preferred stock is considered to be a hybrid security, because some of the characteristics of common stock may have resembling fixed income offerings in many ways. Unlike after like common stocks, preferred stocks tend to stay relatively stable in price after their issuance (most preferred IPOs are priced at $25.00 a share) They behave more like bonds than stocks in a number of ways, as they pay regular dividends at either a set or variable rate of interest, and their prices fluctuate in the secondary market in accordance with interest rates.
On a scale of risk-to-reward, preferred stock is generally considered to be just slightly more risky than that of corporate bonds, but safer than common stock. This is due in part because preferred stockholders will receive their principal back after all bondholders have been paid, but before common shareholders in the event of corporate liquidation.
The majority of preferred stock offerings are issued by financial entities, such as banks and insurance companies. Companies in heavy industry, technology, and healthcare tend to be more focused on growth and reinvesting their funds back into their own company. Due to...