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Preferred stocks are income happy options that can offer a low-risk regular income, although, these can be riskier in comparison to bonds. Many investors like to own preferred as it is given priority in profits and during liquidation but these may not have a predefined term and can remain outstanding. Its dividends can be postponed that is paid later without penalty. Legally interests on bonds are paid first before common or preferred. These are advantages for the firm as the company is not obliged to pay dividends, especially, when the profits are low. These do not carry a voting right and the company can raise funds without losing power over the administration and management. The option does not create an obligation for the firm to pay from the assets and the fixed assets can remain free of mortgages.
For investors, it has a lower potential to appreciate. It can be a kind of mix of debt and equities and get returns in the range of 6 to 7 per cent. These are fixed income investment that may or may not appreciate, simply fluctuate in the price range. Some are convertible which can be exchanged for a specified amount of common shares.
The board may vote to convert it into other stocks where the investor may or may not know about the conversion, or there may be a predefined date for auto conversion. It can be of the cumulative types where unpaid dividends accumulate in the account and are given before any dividend is given to the common shareholders, or it can be a non-cumulative type of investment.
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