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Preferred Treatment for Stocks?

September 14, 2006 By:
Craig G. Langweiler, JE Feature
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When people talk about stocks, they are most often referring to the class known as common stock. It's well-known that common stocks have the potential for capital appreciation, and they have produced a higher historical return than most forms of investment, but this has come with the increased risk of losses and more volatility overall.

Fewer people are familiar with the attributes of preferred stock. Preferred stock has been described as a security with a "fixed income" personality, or an instrument that is somewhere between a common stock and a bond. Here's what every investor should know about the less famous member of the stock family:

Like common stock, preferred stock represents ownership in a company. However, that is where the similarities end. Owners of common stock receive one vote per share when electing the board members who oversee decisions made by management. Owners of preferred stock generally have no voting rights.

Most preferred stocks pay a fixed dividend for as long as you own the stock, whereas common stock dividends vary, and are determined by the board of directors. In both cases, dividends can be suspended, but preferred stockholders are entitled to their dividend payments before common stockholders.

In the event that a company is liquidated, creditors and bondholders are paid first, and then preferred stockholders. Owners of common stock are paid last.

The market prices of preferred stocks physically do not fluctuate as much as common stock prices, but like bond prices, they are sensitive to changes in interest rates. As rates go up, prices go down -- and vica versa. Another bond-like attribute: Many preferred stocks have call features that allow companies to buy them back.

The return and principal value of stocks fluctuate with changes in market condition. Shares, when sold, may be worth more or less than their original cost.

Investors who are seeking a steady income stream may appreciate the higher dividend payments associated with some preferred stocks. An examination of your situation can help determine whether specific common or preferred stocks are appropriate for your portfolio.

Craig Langweiler is president of the Langweiler Financial Group in Newtown. He can be reached at 215-860-8088 or at: clangweiler@ americanportfolios.com.

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