Risks in Investing in Preferred Stocks

From Financial Literacy Wiki

Below are some risks in investing in Preferred Stocks, Preference Shares or Preferred Shares.

• Dividends payouts are not guaranteed or cumulative

Dividends payouts are not guaranteed, there might be years where it will not be paid out. It might not be cumulative as well, meaning if dividend is not paid out for one year, it is not obliged to pay the arrears in the following year.

• Issuers are not obliged to redeem shares

You can be stuck with the shares if the issuers choose not to redeem the shares. You may have an option to sell on the open market but that would depend on the liquidity of the shares. Thus such shares are more suitable for people with surplus cash.

• Shares can be worth less than initial price

There is a chance that the shares would be traded at a price less than initial price depending on market conditions like interest rates, issuers credit standing.

Generally, in market where the long-term interest rates are rising, there is a high probability that the price of the preferred stocks will fall.

• Shareholders are the last to be paid if issuers bankrupt

Holders of Preferred stocks are among the last to be paid when issuers bankrupt. They will have their claims only when debt holders are fully paid. This explains why the interest rate is higher compared to bonds, to compensate for the additional risks taken by holders.