Preferred Stocks and Convertibles

Introduction to Preferred Stocks and Convertibles

Preferred stocks and convertible bonds are hybrid securities combining equity and debt features. 

• Preferred stocks provide fixed dividends like bonds but represent ownership in a company, typically without voting rights.
• Convertible bonds are corporate bonds that can be converted into a set number of common shares.

These instruments offer steady income with the potential for capital appreciation, balancing risk and return by blending the characteristics of both stocks and bonds.

What Are Preferred Stocks?

Preferred stocks are a type of corporate ownership with a higher claim on assets and earnings than common stock, but below bonds. 

They typically pay fixed dividends and usually lack voting rights. In bankruptcy, preferred shareholders are paid after creditors, but before common shareholders. Types of preferred stocks include:

• Cumulative (unpaid dividends accrue)
• Non-cumulative
• Participating (may receive extra dividends)
• Convertible (can be exchanged for common shares)

Daniel Invests in Preferred Stocks

After extensive research and careful analysis, Daniel opts to invest in the preferred shares of Harborview Utilities Corp., a reputable firm renowned for its consistent performance in the energy sector. 

The preferred stock provides a 5.5% annual dividend, paid quarterly, ensuring a steady income stream. 

Daniel values the priority of dividend payments over common shareholders and the inherent stability of the utility industry. This aligs with his long-term goal of saving for a future home.

What Are Convertible Bonds?

Convertible bonds are corporate debt that can be exchanged for a set number of common shares.

Like traditional bonds, they pay regular interest, but also offer exposure to equity appreciation.

The conversion ratio and conversion price determine how many shares a bondholder receives.

Convertible bonds blend fixed-income security with the opportunity for capital gains, appealing to investors seeking income with upside potential.