Would You Like to Buy Preferred Stock?

We are going to start a three part series on Preferred Stocks. Over the past 20 months, I have been telling you to limit your purchases of Common Stock. Some of you are saying, “What is Common Stock? Investopedia explains it this way. It is “A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy.”

In June 2009, I suggested that you buy FORD MOTOR COMPANY Common Stock (Symbol: F) for a price under $7.00. As of Oct. 15, 2010, the price is $13.91 and got as high as $14.57 in the past 52 weeks. The stock sold as low as $6.61 on Oct. 2, 2009.

Now we are going to talk about investing in Preferred Stock. Investopedia says that it is “A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. “

“The precise details as to the structure of preferred stock are specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation).” Preferred Stock is also known as "preferred shares.”

Investopedia goes on to explain Preferred Stock, “There are certainly pros and cons when looking at preferred shares. Preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation and they have a fixed dividend (paid before common stockholders), but investors must weigh these positives against the negatives, including giving up their voting rights and less potential for appreciation.”

Before you jump into Preferred Stock, I think you should know what you are getting into. The positive about Preferreds are; it gives higher dividends than common stock, it is not as volatile as common stock. The negatives are that they do not mature like bonds; dividends generally do not increase; most do not increase in value like common. You can think of Preferred Stock as a hybrid between a stock and a bond.

They are more complicated than they may seem. That is why we are going to do a series on Preferred Stocks. Next time we will look at Convertible Preferred Stock.

How is Darnell’s IRA doing?

On Sept. 13, 2010, the market is up 6.42% YTD as measured by the Dow Jones Industrial Average. My IRA is up 24.20% YTD and since the end of January 2009, I am up 76.33%. My short term objective is to make 100% by January 2012.