Sometimes a name can tell you a lot and sometimes a name doesn’t exactly convey the essence of its subject. The latter is the case with preferred stocks. Like common stock, preferred stock is a type of share that a company can issue in the stock market. While it does have some rights and features, a preferred stock describes a hybrid security that is a fixed income investment and not an investment for appreciation. Over the years, people have developed a misconception as to the benefits and drawbacks in owning preferred stocks. Some of the things to consider when contemplating a purchase of preferred stocks are stock dividends, the benefits and disadvantages of preferred stocks and the reasons to own them.

Stock Dividends
Preferred stocks usually pay a fixed rate dividend; this feature makes it very similar to a corporate bond. Preferred stock does have first claim to dividends as well as assets of the corporation in the event of liquidation. Because of what was seen as a positive, fixed investment, many people involved with long term investing sought out preferred stocks for a consistent return on investment. As companies have struggled with profitability over the past decade, they have frequently chosen to reduce or eliminate dividends in cost-cutting maneuvers, eliminating the most attractive benefit of preferred stocks.

In addition, preferred stocks do not afford their holder rights of voting and they do not appreciate like common stocks do. Preferred stocks are usually bought by companies that can use their tax advantages to avoid much of the taxes on the dividends.

Benefits of Preferred Stocks
Individuals have the right to own and benefit from preferred stocks, but understand that you need to be very careful because not all shares and investment options are equal. Many preferred stocks are callable which means that if market prices fall, the company can call the shares. You will receive your money back, but will have to reinvest at new, lower rates. In addition, preferred shares may carry different restrictions and qualifications that vary from company to company. Before you buy preferred stocks, it is wise to acquire stock market advice by meeting with your tax or financial consultant to verify that you are eligible for the 15 percent dividend tax benefit or if they will be considered ordinary income.

Are There Good Reasons to Own Preferred Stocks?
For the average investor, buying preferred stocks may not be the best investment advice. Although they have drawbacks as well, bonds have similar benefits to preferred stocks and they also feature a fixed income since they are guaranteed by the bond’s indenture. As companies look for cost cutting opportunities, their dividends become potential targets, undermining their appeal. It is important for someone involved in defensive investing to look at each company’s dividend payout history for at least ten years to verify that the company hasn’t been using dividend cuts to improve their bottom line or to fund cost-cutting.

Conclusion
If you are completely informed on a particular preferred stock and have been diligent with your fundamental analysis, there is nothing wrong with owning preferred stocks; however, many investors would suggest that there are better investments that deserve your analysis time and attention. There are simply too many other options, including high quality bonds, high-paying money market accounts, common stocks, options trading and investing in futures markets, that are far less complicated and provide more potential benefits than preferred stocks. The preferential treatment that many investors expect from preferred stocks is no longer available, and good, profitable investments can be found in other vehicles.

Market Direction:

Was this a market reversal or profit-taking? That is the big question for most investors. However, for the candlestick investor, this analysis becomes a lot easier. What are the signals telling us as the stochastics move from overbought to oversold? Will we see a bounce in this downtrend? If so, what becomes a potential target? The signals create the opportunity to implement proper trading strategies appropriate for specific market conditions. The last few days of trading after the big downdraft, indicated bullish sentiment. Is it time to establish long-term positions? Possibly, but it may not be the correct strategy just yet.

The establishment of bullish positions may be correct with the consideration they may be short term trades. This makes the trade more in line with what the market may currently be doing. Putting on long positions on the short term, and closing out if the markets show sell signals indicating a short-term bounce.

What becomes the appropriate analysis? It can be assumed that if a stock price was moving with relatively good strength before the selloff, buying back at the appropriate time creates the probability of being in a strong position that has experienced profit taking. IPSU is evidence of this occurrence. Notice it has formed a bullish engulfing signal after a pullback right to the 50 day moving average.

IPSU

The markets will tell us what the market is going to do. Use your candlestick knowledge to lower your risk and produce some good gains by being in the right direction at the right time.

Good investing,

The Candlestick Forum Team

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