Definition of High Grade Preferred Stock

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"Preferred stock" is a type of investment class that differs significantly from common stock. While, like common stock, preferred stock represents ownership of a company, the price of preferred stock does not change nearly as much because the price is governed almost exclusively by the dividend paid by the company.


"High grade" refers to the quality of an investment as designated by a credit rating agency.

Preferred Stock

  • Stocks are equity investments. Bonds are debt investments. Preferred stock functions as a cross between a stock and a bond. Preferred shares are equity investments that you can buy and sell like shares of common stock. However, like bonds, they are issued with a "par" value, with the dividend fixed at a certain interest rate. It is the dividend that governs the price.

    Preferred stockholders have no voting rights.

Difference between Preferred Stock and Bonds

  • When interest rates rise or fall, the price of bonds moves in the opposite direction. This is also true of shares of preferred stock if the dividend paid by the company ever changes. However, since the company sets the payment of the dividend, the payments don't change very often, so the owners of preferred stock simply wait and collect dividend payments while the value of their shares changes little. This does not mean that preferred stock dividends are guaranteed never to change.

The Pecking Order

  • Dividends of preferred stock have a higher priority than dividends paid to common stockholders. Payments to bondholders have higher priority than preferred stock.

High Grade

  • Credit rating agencies like Moody's or Standard and Poor's assign grades to companies and governments. AAA is the best, while anything below BBB is junk. Anything with an A grade or higher is considered high grade debt.

    Because preferred stock payments are not as assured as bonds, credit rating agencies typically rate preferred stock a notch or two lower than the bonds issued by the same company. So a company whose bonds are graded AA+ might have preferred stock rated A+ or AA-.

High grade preferred stock

  • High grade preferred stock would be any preferred stock rated A or higher by a credit rating agency.

References

  • Photo Credit money 3 image by Fyerne from Fotolia.com
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