HOW DO PREFERRED SHARES DIFFER FROM COMMON SHARES? - ProProfs Discuss
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How do preferred shares differ from common shares?



Asked by Holly, Last updated: Feb 14, 2021

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John Smith

John Smith

John Smith
John Smith

Answered Sep 08, 2016

Preferred shares do not appreciate in price the same way that common shares do.preferred shareholders do not participate in the profits of the company in the same wayas common shareholders are entitled to. when you buy a preferred share, what youare essentially buying is a cash flow, i.e., the promise of a fixed dividend payment on aregular basis.so lets say you paid $25 for a preferred share that pays a $1.50 dividend per year.thats a yield of 6% ($1.50 / $25). what happens if the general level of interest ratesrises well above 6% all the way to $10? the value of your investment isnt worth asmuch as it was when interest rates were lower, since you still only receive a $1.50dividend. lets say i wanted to buy your preferred share. how interested do you thinki would be in paying you $25 to buy something that gives me a return of only 6% wheni know i can probably find a short term interest bearing security that pays closer to thegoing market interest rate of 10%? theres no way id pay you $25. in fact, youll haveto drop your price significantly so that $1.50 fixed dividend represents a greater returnon the price of the shares. in other words, you might have to drop your preferred sharesale price as low as $12 in order to attract my attention ($1.50 / $12 = 10%). if thepreferred share yields somewhere near the current market interest rate of 10%, i mightconsider buying your shares.so one of the most important considerations when buying preferred shares is the yieldand current level of market interest rates.
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