What is a Preferred Share?

TL;DR

Preferred shares offer higher yields than bonds but come with more risk, as they lack the safety nets and guarantees provided by bonds. They are a hybrid security, providing stable income like a bond but fluctuating in price like an equity.

Transcript

this video is sponsored by Skillshare go to SKS h / the plain bagel - to get a free two month premium trial as many viewers are aware it's become increasingly harder for investors to secure a reasonable yield on fixed income investments in the current environment yield is of course the income return of a security the money it pays you / its market ... Read More

Key Insights

• 🔒 Preferred shares are a hybrid security that combines elements of bonds and common shares.
• 🖤 They offer higher yields than bonds, but they lack the safety nets and guarantees provided by bonds.
• ❓ Preferred shares are treated as a fixed income instrument, providing stable dividends and greater stability compared to common shares.
• ☄️ However, they come with more risk, including the potential for missed dividend payments and fluctuating prices.
• 🖤 Preferred shares do not offer voting rights and lack bond covenants for investor protection.
• 🍧 They may have individual features that affect risk and return, such as being cumulative or non-cumulative, callable or retractable, or having varying payout options.
• 🫗 Preferred shares are less liquid than bonds and common stocks, which can make them harder to sell, especially in a downturn.

Questions & Answers

Q: How do preferred shares differ from common shares?

Preferred shares pay higher dividends, do not offer voting rights, and have seniority over common shares in bankruptcy. They are more similar to bonds in terms of stability and fixed income.

Q: What are the risks associated with preferred shares?

Preferred shares lack bond covenants and safety nets, meaning the issuing company may not pay the promised dividend. They are also less liquid than bonds and can fluctuate in price.

Q: What are some features of preferred shares that affect risk and return?

Preferred shares can be cumulative or non-cumulative, callable or retractable, and have varying payout options. Some may offer a rate floor or adjust dividends based on benchmark rates.

Q: Why do investors choose preferred shares?

Preferred shares offer higher yields than bonds, provide stable income, and are taxed more favorably. They are also useful for corporations to raise capital without diluting ownership or risking defaults.

Summary & Key Takeaways

• Preferred shares are a hybrid security that pays a regular dividend, tends to have higher dividends than common shares, and is senior to common shares in bankruptcy situations.

• While they resemble bonds in terms of stability and fixed income, they do not offer voting rights and lack bond covenants for investor protection.

• Preferred shares trade close to their par value and provide higher yields than bonds, but they are riskier and less liquid.