What Are the Advantages and Risks of Owning Preferred Stock?
Video Summary: Explaining the pros and cons of preferred stocks with an example of GE preferred stock
Preferred stocks are a hybrid security that has components of both stocks and bonds to them. They are stocks in the capital structure of a firm, so you own an equity in the firm that you would purchase that. So if you own GE preferred stock, for example, you are a shareholder of GE but they're usually non-voting.
The significant advantage to preferred stock is they typically have a specified dividend rate which could be comparable to what bonds are paying at the time. But it's important to understand because they are equities in the capital structure, even though preferred stocks pay a fixed dividend, they trade much more like a stock.
And so, if the stock of a company is following generally, the preferred stock will also fall. So they are a higher risk investments than traditional fixed income investments.