The Pros and Cons of Preferred Stocks

If you have been looking at buying some stocks or shares you may have come across the term preferred stocks. But what does it mean, and are these stocks any more beneficial than common stocks?

Let's take a look at what preferred stocks are to begin with. Basically speaking if you own preferred stocks in a company you will be paid a dividend on those stocks before any other common stockholders receive anything. This means that the common stockholders may not get anything, but you should still receive a payout.

The main benefit of this is of course safety. You are more likely to make money with preferred stocks to an extent, because if the dividends are limited the preferred stockholders will be first in the queue for payment. On the negative side however, because they are a safer bet you won't have the same opportunity to make a higher profit. So you need to consider how safe you want your investment to be before deciding whether to buy such stocks or not.

Preferred stocks do offer the benefit of some advance knowledge though. If they pay a fixed dividend you can look at them and know how much profit you can look forward to. If you owned normal stocks you wouldn't have that advantage.

But the downside of this is that common stocks could rise by a huge amount and end up being more profitable than preferred stocks. You need to ask yourself how much risk you want to have with your investment, and what you would like to earn from it.

Of course some businesses - no matter how successful they might have been in the past - end up going under at some point. You would hope that this wouldn't happen to you because your shares could end up being worth nothing at all.

This is one situation in which having preferred stock is a good thing. In this case you would very likely get your money back - or at least some of it. In essence it can provide you with a small cushion of protection as opposed to nothing at all.

So if you are thinking of buying some shares and you don't like the risks associated with common stocks, consider buying preferred stocks instead. They might just be what you are looking for, and they are certainly the safer option in general.

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