What Is a Preferred Stock?

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A preferred stock pays a higher dividend to shareholders, is paid first in the event of liquidation and may not be entitled to the participate in the overall growth of a business. Speak with a knowledgeable stockbroker to discuss the benefits of preferred stocks over common stocks with advice from a financial adviser in this free video on stocks.

Part of the Video Series: Investment Terms & Facts
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Video Transcript

Have you ever consider buying stock? Hi, this is Roger Groh with Groh Asset Management. Along with trying to identify the rate company that put money in; one of the things that you probably had to consider is, what type of stock to buy. Do you want to buy common stock or do you want to buy today's topic which is preferred stock? The difference? Well, in the event of liquidation, a preferred shareholders is going to get paid first. In today's world, that's a pretty important thing. Frequently, preferred stocks pay a higher dividend to shareholders than common stocks. Frequently though, preferred stocks are not entitled to and do not participate in the overall growth of the business. You're more of a bondholder than a stockholders; at least from a technical point of view. Maybe the best of both worlds is a preferred stock with a high dividend yield that is also convertible end to the common stock. That way, you get the advantage of the yield while you wait; on the other hand, if the long term growth of the business is terrific, you can participate. The preferred stock may sell at a discount to the equivalent value of common stock; so you have to be careful. You need to speak with a very knowledgeable broker or banker about that type of issue. Other ways you can do it? If you have access to the institutional site of Bloomberg or Reuters, you can certainly pull up a broad list of preferred stocks that are listed both here in the United States and internationally. So they're terrific especially if you need income. One other note, sometimes with preferred stocks, the dividends are treated differently from a tax point of view as dividends in common stock. You check that out carefully and know what you're buying ahead of time. If there's any question about it, ask your tax accountant or tax attorney. Hope that helps; I'm Roger Groh with Groh Asset and thank you very much for spending time with me.


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