What Characteristics Does Preferred Stock Lack?

Preferred stock is a type of security that represents ownership in a company, but with certain differences from common stock. Whilepreferred stockmay offer some advantages over common stock, it also lacks certain characteristics that investors should be aware of. In this article, we will explore the key characteristics that preferred stock lacks, and what this means for investors.

Fixed Dividend Payments

One of the key differences between preferred stock and common stock is that preferred stock typically pays a fixed dividend. This means that the company is obligated to pay a certain amount of money to preferred shareholders each year, before paying any dividends to common shareholders. While this can be attractive to income-oriented investors, it also means that preferred shareholders may miss out on higher dividend payments if the company's profits increase.

Voting Rights

Another characteristic that preferred stock lacks isvoting rights. Unlike common stock, which typically grants shareholders the right to vote on important company decisions, preferred stockholders generally have no voting power. This means that they have no say in matters such as electing the board of directors, approving mergers or acquisitions, or making changes to the company's bylaws.

Limited Upside Potential

One of the main reasons that investors buy stock is the potential for capital appreciation - that is, the opportunity to profit from an increase in the stock price. However, preferred stock generally haslimited upside potentialcompared to common stock. This is because preferred stock is often issued at a fixed price, and typically does not appreciate in value like common stock can.

Lower Liquidity

Another characteristic that preferred stock lacks isliquidity. Preferred stock is often less liquid than common stock, meaning that it may be more difficult to buy or sell shares in the market. This can be a disadvantage for investors who need to quickly liquidate their holdings or who want to take advantage of short-term price movements.

Conclusion

In summary, while preferred stock may offer certain advantages over common stock, it also lacks important characteristics that investors should be aware of. These includefixed dividend payments, voting rights, limited upside potential, and lower liquidity. As with any investment, it is important for investors to carefully consider their objectives and risk tolerance before investing in preferred stock. By understanding the key characteristics of preferred stock, investors can make informed decisions about whether this type of security is right for their portfolio.