Video Transcript: Preferred Stock

hello, welcome. We're going to discuss preferred stock. Preferred stock is a  class of ownership in a corporation that has a higher claim on its assets and  earnings than common stock. Preferred shares generally have a dividend that  must be paid out before dividends to common shareholders, and the shares  usually do not carry voting rights. Preferred stock combines features of debt in  that it pays fixed dividends and equity, in that it has the potential to appreciate in  price. The details of each preferred stock depends on the issue, so we don't you know how much of the debt feature does the stock have? Or you know, when  are the payments due? What is the dividend rate? So each of those components will be detailed in the issuance. Preferred shares have less potential to  appreciate in price than common stock, and they usually trade within a few  dollars of their issue price, most commonly, $25 they don't shift outside that  range very frequently. Whether they trade at a discount or at a premium to the  issue price depends on the company's credit worthiness and the specifics of the  issue, for example, whether the shares are cumulative, their priority relative to  other issues, and whether they are callable. Remember, callable that they can  buy back the debt portion earlier than maturity. Callable and convertible  preferred shares. If shares are callable, the issuer can purchase them back at  part value after a set date. If the interest rate falls, for example, and the dividend yield does not have to be as high to be attractive, the company may call it  shares and issue another series with a lower yield. Shares can continue to trade past their call date. If the company does not exercise the option, why would they buy back their shares so they can reissue them at a lower rate, so they can save on their cost of capital. So if they reissue the debt portion of the preferred stock  with a lower yield, they'll save money on interest payments out to those holders.  Some preferred stock is convertible, meaning it can be exchanged for a given  number of common shares. Under certain circumstances, the Board of Directors might vote to convert the stock. The investor might have the option to convert, or the stock might have a specified date at which it automatically converts.  Whether this is advantageous to the investor depends on the market price of the common stock. So if it's converted to common stock in the stock is being sold off in itself from 10 to five, we just lost half our value. What are or what is a  preferred share? It is like a bond, right? And it also have as a component like  common stock, right? So preferred shares pay dividends instead of coupons,  like stocks, but it is a continuous payment stream, like a common stock, a  preferred share is a proportional piece of equity in the business. So preferred  share still represents ownership. You just don't get voting rights with preferred  shares, preferred shares, preferred shareholders, receive their fixed dividend  payments before the common shareholders, but after the bondholders receive  their coupon. So the debt holders get their first, get their payments first, then the preferred shares get their dividend payments, and then what's left over gets  issued to common stockholders. What is a preferred share? Okay? We'll 

continue. How do they work? So you have one bond in Company X, right? It's  got a 30 year term at a face value of $1,000 with a $50 coupon payment, so 5%  yield. So I'll get that $50 coupon payment every year as part of the debt  component of the preferred share, then I'll also receive a dividend payment, 1.5  $1.50 per year on the face value of a $25 preferred share over a 30 year term,  this will yield a 6% unless it's convertible, And then it can be converted all into  common stock. What is a preferred share? Again? Will continue to dive into this. Why would a company want to issue a preferred share? One they need to raise  money, go to the equity markets, sell equities to investors and raise money to  have the flexibility to not make or delay dividend payments if the company  comes across hard time, so they don't always have to pay out the dividend.  They can retain the dividend and not have to issue it out like a debt payment. A  debt payment is you have to make that payment. You have to make that coupon  payment right to retain equity of. The business for common shareholders and  the long run.