Preferred Stock Risk Vs. Common Stock Risk
Preferred stock is a higher priority security than common stock, although most companies are not issuers of preferred stock. Both preferred and common stock have multiple risks depending on the company's earnings, structure and credit ratings.
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Significance
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Preferred stock can be more stable than common stock, depending on corporate earnings. In the event of bankruptcy, preferred shareholders get paid first, whereas there are no guarantees that common holders will get paid at all.
Function
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Preferred shareholders are paid a quarterly dividend at a fixed rate based on par value, whereas not all companies pay a dividend to common shareholders. Common stock is associated with a variable dividend rate, which fluctuates according to earnings.
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Issue Price
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Preferred stock is usually issued to investors at $25 per share, and then shares are traded on the stock market just like common stock. The initial public offering of common stock, however, is determined by the company's underwriting financial institution. There is no guarantee stock value will rise or hold value for either preferred or common shares.
Credit Rating
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Credit agencies rate preferred shares after evaluating the financial health of the issuer. The company's ability to make dividend payments to shareholders is key to high ratings, but low or high ratings can affect price volatility when the Federal Reserve adjusts interest rates.
Earnings
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Companies with fast earnings growth can cause common stock to rise much faster than its preferred stock. However, when losses grow quickly, common stock prices can also plummet quickly, while preferred stock is more stable either way.
Callable Shares
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Unlike common stock, after two years from issuance, preferred shares can be callable by the company any time at par value or sometimes, at a premium to avoid growing debt. This means shares are converted back to cash, usually with a month's notice, despite the fact that preferred stock has no maturity date.
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