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There are pros and cons of investing in preferred stocks. Investing in preferred stocks is one way to assuring a continuous stream of income in the shape of dividends. What this means is that you are assured of a dividend income that may not be available to a common stock holder. Now, as an investor you must be familiar that there are two types of stocks, common stocks and preferred stocks.

Preferred stocks are a hybrid between a bond and an equity. You got the right to a dividend income and this dividend should be paid before any dividends are paid to a common stock holder. These type of stocks can be converted into common stocks. The company fixes the ratio at which the conversion can be done. For example, for one share of these type of stocks, you may be able to get two shares of the common stock or even more.

Another plus point of holding these types of stocks is that in case of a liquidation, you as the holder of these type of stocks will be given preference in the payment of assets as compared to the common shareholder. Now, preferred stocks can be of two types known as Cumulative and Non-Cumulative.

In case of cumulative, if the company fails to pay the dividend in the stipulated period due to various reasons, this must be paid at a later date by the company. So in essence, the dividends accumulate with each period that might be quarterly, semi annually or even annually. When the dividends are not paid, dividends are said to have passed and accumulate as arears in case of the cumulative stocks. In case of non cumulative stocks, if the dividends get passed, you don’t get any arrears. You lose the dividends forever.

Whenever, the company declares a dividend, preferred stock holders get the first right to get those dividends paid and after that common stock holders get their dividends. These dividends get paid as percentage of the par value or a fixed percentage.

Now, there are a few cons of investing in these types of stocks. The most important is that you don’t get any voting right with these stocks. These type of stocks are sometimes issued by the companies to prevent hostile takeovers. So, as a common stock holders have the right to vote but as an investor in these type of stocks though you get preference in getting dividend payments but you don’t get the right to vote.

Another disadvantage of these type of stocks is that they can be called anytime by the company after a certain date. You can’ t do anything if the company decides to call back these stocks after that date. Preferred stocks get thinly traded as compared to the common stocks.

Whatever, there are always pros and cons of investing in any asset. In case, you are looking for a fixed income stream like that you get for a bond then these type of shares should be included into you investment portfolio. Now payment of these dividends are however at the discretion of the company board of directors. If the company is facing cash problems, the board of directors may decide not to declare any dividends.

This is unlike that in the case of bonds where the payment of interest is guaranteed and the bonds are issued with the protection of an indenture. So even if the company is facing cash problems, the interest payment to the bond holders has to be made. But not in the case of these stocks. Anther difference between preferred stocks and bonds is that interest payments are made through before tax profits whereas dividends are paid through the after tax profits.