Preferred stocks are more like bonds than stocks. In general, the new price for a share of preferred stock is $25.00 per share. There are exceptions to this but let us stay with the most common example. If you buy the preferred shares from the broker at its new issue point then you would pay $25.00 a share. Every trade after that time is on the secondary market and the price per share is subject to the laws of supply and demand. The more people that want the stock the higher the price is per share and if fewer people want to own the stock then the price generally goes down.
Every share of preferred stock will have a yield. For example, one share of XYZ preferred stock sells for $25.00 a share at its new issue and has a yield of 5.0% payable quarterly. So the yield upon the first day of issue is 5% and you will get a payment of $1.25 per share per year and you will get that payment quarterly at a rate of $0.3125 per share. (0.3125 times 4 quarters = $1.25) This is either sent to you in the form of a check or more likely it will be deposited in your brokerage account.
Let us then say the price of the stock goes up to $27.00 a share after a few months time. The yield will now show at 4.62 % yield and this applies only to those folks who pay $27.00 per share for the XYZ stock on the secondary market (the name for the stock market after the initial IPO is complete). Worry not, because you only paid $25.00 a share your yield will never change, you will still get $1.25 per share per year and that will forever be a 5% yield for you. It is ONLY the person who buys the stock at a different price than the issue price that will get a different yield than you did as the original owner of the shares.
So let’s look at the opposite scenario. Suppose the price of the stock goes down and not up? If the price of the stock is now 23.00 a share it will still pay $1.25 per share per year making your new yield 5.43%.
To review you bought the issue new, then sold the stock to the second owner, who later sold the stock to the third owner. They all make $1.25 per share per year in interest but the yield changes whenever the price of the stock changes:
You = 1 share at $25.00 per share paying you $1.25 per year interest = 5% yield
2nd owner 1 share at $27.00 per share paying them $1.25 per year interest = 4.62% yield
3rd owner 1 share at $24.00 per share paying them $1.25 per year interest = 5.43% yield
Prices of preferred stocks do not change much but they do go up and down a little most every day. Also when the stock goes ex-dividend (the date that you must own the stock to get the dividend for that quarter) the price of the stock goes down just a little for a while. If you buy the stock the day after it goes ex-dividend, then you do not get the interest payment for that quarter (usually just a few days after the ex dividend date).
Note that preferred stocks pay interest not dividends. Dividends are paid on some common stocks but not on preferred stocks. They do use the term ex-dividend for the date described above and that can be confusing but that is what they call it.
In the overall scope of safety, preferred stocks are safer and less volatile than common stocks and if the company you invested in goes bankrupt the preferred stock holders may get some of their money back before any of the common stock holders are paid. It is possible for any common stock or preferred stock to go all the way to zero which means you lose all your money. Nothing is completely safe but FDIC insured CD's or deposits and Government Bonds are generally among the safest investments although they pay little or no interest these days (2012-2013).
Copyright 2012 All rights reserved, Gregory L. High
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