[ig_row width="boxed" r_class="none" t_class="none" background="none" solid_color_value="#FFFFFF" solid_color_color="#ffffff" gradient_color="0% #FFFFFF,100% #000000" gradient_direction="vertical" repeat="full" stretch="none" position="center center" paralax="no" relative="no" video_b="no" v_mp4 border_width_value_="0" border_style="solid" border_color="#000" div_padding_top="30" div_padding_bottom="30" div_padding_right="30" div_padding_left="30" ][ig_column span="span12"][ig_text enable_dropcap="no" disabled_el="no" ]Preferred stocks are becoming the new favourite of every new investor? Why, you ask? Well, it is better than a common stock as a preferred stock combines both the bonds and stocks of a company. Moreover, if you have a preferred stock in a company, than your stocks will have an upper hand on the earnings and assets. Common stocks are no wonder not the preferred option anymore.
Preferred stocks are something that will pay you fixed and predictable interests much like in the form of dividends. The dividends that will be yielded by the preferred stocks will always be more than that of common stocks. Further a common stock doesn’t give the option of drawing money quarterly or monthly.
If any company holding the bonds goes in distress of liquidation, the preferred stocks will get the first hand in buying the dividends and the common stock holders will come later on. Preferred stocks are better in terms of return and other policies as well. They are also less prone to risk than other bonds or stocks.
Volatility of the market
Investing in certain shares or bonds is not easy and the market is a highly risky place. Every investor is aware of this fact. The stock prices or the share prices may go up or down within weeks, months or even years. But, this is also the way people make money. Knowing the volatility of stock market and playing it right is what gets its investors bucket full of money.
Interest rates are something that will determine the value of the stocks. And the volatility of the interest rates will directly affect the stock prices. Stock markets determine the strength of any country’s economy and interest rates are one of the important macroeconomic variables that will help in knowing where the financial conditions of the company stand.
Further research by trade analysts have also proved the point that when it comes to the volatility of the interest rates, it is directly related to the decline of a market. When the volatility is high in the interest rates, there are higher chances of the economy being toppled.
Evaluating preferred stocks
As mentioned above, preferred stocks are not a single entity but can rather be termed as a hybrid of two or more things which takes features of both common stocks and of course, debts. Preferred stocks have become the favourite of investors because the dividends are received before the tax-payment and if a company is getting financed with the help of its preferred stocks than it is not necessarily susceptible to bankrupty.
Now, the preferred stock price is evaluated with a simple equation which will require the preferred dividend to be divided by the required return on the stock price.
Risks of a preferred stock
Just like everything under the sun, even the preferred stock has some risks associated with it. Investing is a risky business and nothing guarantees complete protection of the money you invest.
The preferred stock will face a huge chance of interest rate fluctuation when the interest rates go awry. The dividends are fixed so when the interest rates of the fixed dividends drop, the preferred stock will go up in its value and vice versa.
Even when a company is liquefied, the first in order to pick after them are bondholders and then the preferred stock holders. So, it is not necessary that they will get the best of everything.
Every stock exchange has a financial stock ticker which will help in knowing the gains and losses in the stock prices of each shareholder. Hence, it becomes important that there is not glitch in the stocker tickers. Even the slightest variation in the stock ticker display could lead to the downfall of the company.