## Why Invest in Preferred Stock?
Preferred stock is a type of hybrid security that combines characteristics of both stocks and bonds. It is typically issued by corporations and offers investors a fixed dividend payment, similar to a bond, while also providing the potential for capital appreciation, like a stock.
Investing in preferred stock can offer a number of advantages over investing in common stock or bonds, including:
### Fixed income payments
Preferred stock typically pays a fixed dividend payment, which is usually higher than the interest payments on bonds. This makes preferred stock an attractive investment for income-oriented investors.
### Preference over common stock
In the event of a liquidation, preferred stockholders are entitled to receive their dividend payments before common stockholders. This preference over common stock provides preferred stockholders with an additional level of protection in the event of a company’s financial distress.
### Potential for capital appreciation
While preferred stock does not typically offer the same potential for capital appreciation as common stock, it can still provide some upside potential. This is because preferred stock is often issued with a call feature, which gives the issuer the right to redeem the stock at a predetermined price. If the stock price rises above the call price, investors may be able to sell their shares for a profit.
### Tax advantages
In some cases, preferred stock dividends may be eligible for favorable tax treatment. For example, dividends on preferred stock issued by qualified corporations may be eligible for the dividend received deduction. This deduction can reduce the amount of taxes that you owe on your dividend income.
### Disadvantages of investing in preferred stock
While investing in preferred stock can offer a number of advantages, it is important to be aware of some of the potential disadvantages as well. These include:
### Lower potential return
Preferred stock typically offers a lower potential return than common stock. This is because preferred stockholders have a lower claim on the company’s assets than common stockholders.
### Call risk
As mentioned above, preferred stock is often issued with a call feature. This means that the issuer has the right to redeem the stock at a predetermined price. If the stock price rises above the call price, investors may be forced to sell their shares at a loss.
### Interest rate risk
Preferred stock is sensitive to interest rate changes. If interest rates rise, the value of preferred stock may decline. This is because investors can earn higher returns on other fixed-income investments, such as bonds.
## Who should invest in preferred stock?
Preferred stock is a suitable investment for investors who are looking for a fixed income investment with the potential for some capital appreciation. It is also a good investment for investors who are concerned about the risk of losing their principal. However, preferred stock may not be a suitable investment for investors who are looking for a high-growth investment or who are not comfortable with the risk of losing their principal.
## How to invest in preferred stock
You can invest in preferred stock through a number of different channels, including:
### Brokers
You can buy and sell preferred stock through a broker. When choosing a broker, be sure to compare fees and commissions.
### Mutual funds
Mutual funds that invest in preferred stock are another option for investors. Mutual funds offer a diversified portfolio of preferred stocks, which can help to reduce risk.
### Exchange-traded funds (ETFs)
ETFs that invest in preferred stock are another option for investors. ETFs are similar to mutual funds, but they trade on exchanges like stocks. This makes them easier to buy and sell than mutual funds.
## Conclusion
Preferred stock can be a suitable investment for a variety of investors. It offers a number of advantages over common stock and bonds, including fixed income payments, preference over common stock, and potential for capital appreciation. However, it is important to be aware of some of the potential disadvantages of investing in preferred stock before making a decision.