Callable preferred stock is a kind of preferred stock in which the issuer has the right to redeem or call in the stock at a price which is preset after a specific date. All terms involved in a callable preferred stock issue, which include; call price, the call premium, and the specific date after in which the stock can be called are all well defined in the prospectus provided at the time of issue and can, therefore, not be altered afterwards. Companies and corporations have various reasons for issuing preferred stock which differs from one company or corporation to another.
Why do Corporations Issue Such Stocks?
One of the major reasons why companies offer preferred stocks is because it is technically an equity vehicle, unlike bonds, preferred stock not a debt security. This enables the company to avoid holding too much of secured debts along with its accompanying risks, this also makes the company able to lower its debt to equity ratio, which helps to improve the scrutinized measurements by regulators and investors. It is worth mentioning that this is good for the company as too much debt results in the downgrade of bonds by the rating agencies and also deter potential buyers.
Given the different features that are associated with stock (callable, cumulative, preferred etc.), what type of stock would you want to buy personally and why?
I would prefer to buy preferred stocks because most of the preferred stocks are cumulative. What this mean is that if at dividends are not paid, or are passed, they would accumulate. Also, most preferred shares come with a fixed dividend amount, which would have been negotiated, and are specified as a percentage of the par value or as a fixed amount.
Reference
Principles of Accounting: Volume II (2012). San Diego, CA: Bridgepoint Education.
