What is Preferred Stock
Preferred stock (or preferred securities) holders are subordinate to secured bond holders, unsecured bond holders, and unsecured subordinate bonds. Bondholders have the protection of being able to force a company into bankruptcy, while preferred stock holders do not have that protection. Beginning in 1996, the Federal Reserve allowed banks to consider preferred stocks as Tier 1 Capital. This capital provides a buffer that enables financial institutions to absorb losses without the interests of the depositors being adversely affected. In addition to essentially being providing insurance to depositors in time of financial stress, preferred stock combines many features of both bonds and common stock. Many argue that they combine the worst features of each. Although preferred stock does pay a dividend in declining markets, preferred securities are closely correlated to stocks.
In a rising market, preferred securities do not enjoy the upside of common stock and therefore act like bonds. Simply put, preferred stocks miss the upside price potential of stocks, but capture the downside of stocks in declining markets. In addition, the volatility of the preferred stock index is significantly higher than that of the aggregate bond index. Preferred stocks are thinly traded, so preferred stock owners have significant liquidity risk. Additionally, preferred stocks issues are heavily concentrated in issuers from the financial services, banking, and insurance sectors.
Preferred Securities or Preferred Stock Risks
Investment professionals often fail to disclose the inherent risks and volatility of preferred stocks to investors. Investors are led to believe that they have a safe and secure investment that pays an above average return. Unfortunately, in declining markets preferred stocks are extremely volatile. Due to these risks, brokerage firms and banks often recommend that no more than 10% of a portfolio be invested in preferred stocks. Investment professionals routinely breach this asset allocation limit, and concentrate retirees in preferred stocks without adequate warnings of the volatility and liquidity concerns for such an allocation. If your investment professional has concentrated your savings in preferred stocks, you may have a claim for damages.
Legal Help for Victims of Preferred Stock Fraud
The Investment Fraud and Financial Fraud Lawyers of Gilman Law LLP is a leading securities fraud law firm and is here to help you recover damages on your preferred stocks claim. For a FREE consultation and evaluation of your case, please fill out our Free Consultation Form Online, or if you need to speak to a securities attorney right away CALL TOLL FREE (888) 252-0048 today.