The Benefit of Preferred Shares

Preferred shares differ from common stock in many different ways. There are pros and cons to either kind of stock, common or preferred, but the biggest benefits come from ownership of preferred stock.

Preferred stock carries no voting rights

Preferred stock, unlike common stock, is not assigned a voting right. Owners of preferred stock have very little say over the happenings within the corporation they represent, but do get preferred treatment in case of failure. You're not going to be able to pull a proxy takeover with your shares of preferred stock, but you'll get a payout, even if the company collapses.

Preferred shares get better dividends

Preferred stock generally comes with a much greater dividend yield than common stock, making its ownership more like a bond than a share of stock. Dividend yields from preferred stock can be as big as twice as much that of common stock, something to consider when making a purchase. If you're willing to let go of voting rights, preferred stock is definitely the way to go when it comes to dividends. Dividends must first be paid to preferred stock holders in full before dividends are issued to common stock; this is great for holdings in a cash strapped business.

Preferred shareholders get paid first

In the case of a bankruptcy or business failure, preferred shareholders get the liquidation money first. This is one of the greatest benefits to preferred stock in that your losses are limited far more than common stock. If you're worried about the financial future of a company, preferred stock is the way to go for such a speculative play. In the case of an all out failure, you're in line first to get some money back.

Some preferred shares can be converted to common stock

Convertible preferred shares can be converted to common stock whenever it is best for the owner. This means that you'll be able to convert preferred shares to common stock when financially advantageous to lock in a capital gain. If the stock is dropping, you'll still be able to enjoy the hefty dividend yields.

How to play preferred stocks

Unless you are buying convertible preferred shares, there is little gain for the average shareholder in buying preferred stock. Convertible shares allow you to go to common stock whenever advantageous and avoid the trap of a preferred share losing equity as dividends rise. Because preferred stocks trade a lot like bonds, their yield comes from a change in the price of the stock, rather than a change in dividend amounts, straight preferred stock can lose its value as dividends rise.

It's almost a toss up in what kind of stock is the best for you. Preferred stock works best for companies with a high chance of default, otherwise common stock is likely the best choice. Though many companies shy away from preferred shareholders, most mega-giants of the stock markets deal with preferred stock as a way to raise capital for expansion. Preferred stock is more common in private companies than public companies, but there are still plenty of options for a preferred stock investor.