Final answer:
Preferred stock is a hybrid security that combines features of both common stock and bonds. It represents ownership in a company and usually pays a fixed dividend. Investors may choose preferred stock for its steady income stream and potentially lower volatility.
Step-by-step explanation:
Preferred stock is a type of hybrid security that combines elements of both common stock and bonds. It represents ownership in a company, similar to common stock, but typically comes with a fixed dividend payment, like bonds. Unlike common stockholders, preferred stockholders have a higher claim on a company's assets and earnings.
The main characteristics of preferred stock include:
- Dividend preference: Preferred stockholders have the right to receive dividends before common stockholders.
- Fixed dividend rate: Preferred stock pays a fixed dividend rate, which is predetermined at the time of issuance.
- No voting rights: Preferred stockholders typically do not have voting rights in the company's decision-making process.
- Callability: Some preferred stocks can be callable, meaning the issuer can redeem them before the maturity date.
Investors may choose preferred stock as part of their portfolio for various reasons. For example, preferred stock can provide a steady income stream through regular dividend payments. It can also offer a higher yield than common stock and may have less volatility. However, it is essential to understand the risks and benefits associated with preferred stock before investing.