How Is Preferred Stock Similar to Bonds?

Preferred stocks share similarities to bonds.

Preferred stock share some similarities and advantages over bonds that investors can add to diversify portfolios. Preferred stocks are half fixed-income and half equity.

Identification

Preferred stock represents ownership within a company, which has higher priority over assets and earnings than common stock.

Fixed-Income

Preferred shares offer a fixed dividend while bonds offer a fixed coupon rate. These are fixed, regular payments that the investor can expect to receive while the asset is owned.

Risk

Preferred stock and bonds are deemed safe investments. Preferred stocks have relatively lower volatility than common stock. Government and municipal bonds are a low-risk investment due to the unlikelihood of the government to default on the bond. Corporate bonds may have a higher risk potential.

Debt Security

According to Forbes Investopedia, preferred stock and bonds are both debt securities. These are debt instruments that can be bought or sold between investors.

Differences

Preferred stocks are half fixed-income and half equity. It pays out a fixed payment, such as a bond, but the investor can profit from capital gains (selling for a profit).

References

• Forbes Investopedia: Preferred Stock
• Forbes Investopedia: Bond