- The Differences Between Preferred Stock and Convertible Preferred Stock
- How do I Convert Preferred Stocks to Common Stocks?
- How Can I Buy Convertible Preferred Shares of Stock?
- Equation for the Present Value of Preferred Stock
- Redeemable Vs. Retractable Preferred Shares
- What Are the Effects on EPS of Convertible Preferred Stock & Bonds?
Companies issue stock to raise money to invest in their business and to finance new initiatives. When investing in companies, you can take advantage of the various types of shares and how companies have structured them to match your investment goals. Convertible redeemable preferred shares are flexible instruments with reduced risk. Choosing stock that has the characteristics matching your needs helps ensure that your investments give you the return you want.
When you invest in stocks, you are looking for a combination of income and capital gain. Besides this return on your investment, you are ready to assume a certain level of risk, and you want a given flexibility in being able to sell the shares. Common stocks have a relatively high risk, can generate little income and are very flexible. If that profile doesn't match your needs, you can consider more complex, structured stock investments with additional characteristics.
As indicated by its name, preferred stock comes ahead of common stock when a company issues payments. Such payments might be regular dividends, special dividends or payments upon liquidation or restructuring. This means preferred stocks are less risky than common stocks and that they can generate a regular income. When you invest in preferred stock, you can count on getting dividends every three or six months or annually -- depending on the company's dividend payment schedule -- unless the company is in financial difficulty. If such financial problems result in bankruptcy, you get paid before the common shareholders get any money, but after creditors and bondholders.
Companies issue redeemable stock if they issue preferred shares that pay high dividends but they want to be able to cancel the shares in the future. The stock can be redeemable at a fixed date or upon an expected event, such as the death of the owner. When you invest in redeemable stock, the company may send you a check and cancel your shares when the specified event happens, or you may be able to plan for the redemption if the date is fixed. The redeemable feature adds a risk that you may have to look for another investment when the situation is not favorable.
Since their dividends are fixed, preferred shares don't go up in value as much as common shares when companies do well. To make their preferred shares more attractive to investors, companies sometimes add convertibility. This means that, when you buy convertible preferred shares, you have the option to convert them into a specified number of common shares if the common shares rise in value. This feature is attractive if you want initial low risk but a higher return if company performance is better than expected.