When you invest in a company, there are two basic types of stock you can purchase: common stock and preferred stock. If you invest in common stock which, as its name implies, is most common, the company cannot force you to sell your shares back to them. Preferred stock, on the other hand, is oftentimes "callable" or "redeemable," and the company does have the right to force investors to sell back their shares.
Why Issue Callable Stock?
Preferred stock has more in common with bonds than it does with common stock. Preferred stock provides a guaranteed dividend, which is distributed periodically to investors just like bond interest. Issuing callable stock offers the company protection against future interest rate fluctuation. Just like a homeowner wants the ability to refinance should rates drop in the future, a company wants the right to call back stock that pays a higher rate when rates go down.
What Investors Receive
Investors have protections specifically related to their callable preferred stock. If the company forces them to sell back their shares, the company must first meet certain obligations. First, most preferred shares are not callable for a certain period of time after they are issued. If a stock you own is called, the company must pay you the par value of the stock -- which is much like the face value on a bond -- they must pay a call premium and they must pay you for any dividends that are in arrears as well as a prorated payment for the last dividend payment.
Sometimes companies repurchase stock. This should not be confused with calling back preferred stock shares. When a company repurchases stock shares, they buy shares on the open market, they do not force investors to sell shares they do not wish to part with. Company stock repurchase programs actually benefit investors as it removes shares from the market, which increases the percentage of ownership each remaining stock share represents.
While buying callable preferred stock requires investors to assume the risk their stock may be called back, it does offer some rewards as well. Companies generally pay a premium for the right to call back stock in the future. This premium translates into higher dividend payments than comparable non-callable stock offers.
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