PREFERRED SHARES
Common shares are only one kind of investment opportunity available on the stock market, and common shares are not the only vehicle that a company has to raise capital. As a company grows and becomes more successful, they may still need to raise more cash in order to finance that growth or acquire new technology or perhaps acquire another company. There are many reasons a company continually needs to reassess their financial situation and look to the stock market for help. Another form of common share called a preferred share may provide an excellent vehicle for both the company and the investor.
A preferred share has a few differences from the other share we have talked about – the common share. A preferred share is still a unit of ownership in the company. But the added benefit includes a fixed dividend on each share. The company promises to pay an established dividend to the shareholder regularly before it pays any dividends out to the common shareholder we talked about earlier. The benefit for the investor is a fixed income or yield. In addition, in the event of any business wind-up, they will pay a preferred shareholder their portion of assets before a common shareholder. There are some accounting advantages for the company to have equity or owners instead of debtors on their books if they borrowed this money instead of creating and selling preferred shares.
Preferred shares may not be the most exciting investment in the world, since their trading price is governed more by what is available in terms of average yield rates than the usual ups and downs of a common share. However, for the investor looking for both safety and yield, they provide a very nice possibility to take part in both areas. We find that preferred shares are most often available for only senior and successful business enterprises. Share prices for preferreds can fluctuate based on the success of the company but most often, by changes in interest rates available to investors.
We will not delve into financial planning, but if your country has any special tax treatments for capital gains or dividend income, you want to be aware of these as they can influence your investment decisions. Find a link to your taxation department and investigate – it could be very advantageous because countries like to promote investment in their local economies.
WHY STOCK PRICES CHANGE
This might be the right place to discuss how and why share prices change. If we return to our initial installment, we talked about the stock market being like an auction. There are buyers and sellers, and they determine the stock price at any given moment. To put it simplistically, buyers think the stock price will go up and sellers usually think the opposite. To put it simply, share prices often anticipate the future financial well-being or hardships of the company. Remember from our previous installments that a company is required to report to its shareholders regularly. The report will review results from the prior quarter or year but also look into the future and project (almost always positive) developments they expect.
Journalists, analysts and others are always looking into the projected health of public companies and expressing an opinion about what they will or will not accomplish. These opinions often fuel the rise or fall in the stock price. When you decide to investigate or buy a company’s stock, you discover that Mr. Google and Facebook, among others, have already learned that about you and begin feeding you all kinds of information. So, why didn’t we both buy Google or Facebook or Microsoft when they were being created in some weird geek’s dorm room? Anyway, as we get more involved in all things “stock market,” we will begin to research and form our own opinions about whether a company represents an excellent investment opportunity. Just remember, you can’t believe everything you read, so be cautious about the source of the information. The price of a common stock usually represents what other investors think will happen in the future. Yes, there are both negative (I want to sell) and positive (I want to buy) sentiments out there – that’s what makes it an auction. Your job is to decide which side of the fence you sit on. If there was only one correct answer, this whole investing thing would be a piece of cake.
There are no guarantees in the stock market, so doing your own research or looking to a trusted source of research is absolutely vital to your success as an investor.
There are a number of other investment vehicles available and we will look into these in future installments. If this is your first exposure to this series, you will want to review our previous articles and don’t be afraid to comment or send this to friends. You can also contact me if you have questions with this one proviso, I am not offering specific investment advice but hope that you can benefit from having some basic knowledge about how the stock market works.