Final Fans

Archive for December, 2009

Preferred stock may sound a lot like common stock, but it generally behaves more like a bond. While a share of preferred stock does represent ownership (normally without the voting rights), it pays a fixed yield, like a bond. In general, companies issue preferred stock as a way of raising cash without diluting their common shares. The vast majority of preferred stock is owned by institutional investors, not individuals, and the price tends to be less volatile than common stock.
Preferred shareholders receive dividends before common shareholders, and if a company experiences a financial shortfall and suspends dividends, it is generally required to make back payments to preferred shareholders before it pays common shareholders. Also, in the case of bankruptcy, preferred stock owners are in line to get paid ahead of common stock owners. As a result, while preferred stock is less volatile than common stock, it doesn’t offer the same opportunity for growth and its value is more affected by interest rates. As an added incentive, some preferred stock can also be converted into common stock.

If you want it all—growth and income, as well as stocks, bonds, and cash-equivalent investments—these mutual funds contain a mix of these three asset classes. Talk about well rounded! The beauty of balanced funds is that they spread out your risk among all the major types of investments, which can save you time.
One word of caution, though: Many balanced funds consist primarily of large-cap stocks and Treasury bonds—and may not include small-cap or international stocks. Therefore, if you buy a balanced fund, you need to look carefully under the hood; otherwise you may not be as diversified as you think.