Understanding Preferred Stock

• 1). Look at the company's balance sheet. Find the section located between debt and common stock. That is where you will find information about the company's preferred stock. Think of preferred stock as a debt/equity hybrid. It has some features of a bond and some features of common stock. Preferred stock, like a bond, has a fixed dividend. The value of preferred stock changes with interest rates. Like equity, it represents a partial ownership in a company.
  
  
• 2). Read the preferred stock prospectus. A prospectus is an offer to sell securities, detailing all important information about those securities. Consider dividends. Since preferred stocks pay fixed dividends, this is an important consideration. Preferred stockholders receive higher dividends than common stockholders. Many investors like this income-generating feature of preferred stock. Preferred stock dividends must also be paid before any common stock dividends.
  
  
• 3). Look at the preferred stock's historical price performance. This information does not in any way guarantee future performance. But a long history of price declines may be a warning sign. Prices of preferred stocks tend to have less appreciation as common stock prices. Investors in common stock are usually in it for the dividends.
  
  
• 4). Consider the risks. Buying shares of preferred stock is risky as the shares can lose value. Principal, or the initial amount invested, is not guaranteed. Preferred stock is not as volatile as common stock, but it tends to have less upside as well -- much like a bond.