Personal Finance For Canadians For Dummies (2018). p 472 Middle.

preferred stock: Preferred stock dividends must be paid before any dividends are paid to the common-stock shareholders. Although preferred stock reduces your risk as an investor (because of the more secure dividend and greater likelihood of getting your money back if the company fails), it also often limits your reward if the company expands and increases its profits.

Please see the titled question, founded on the last sentence in the quote overhead.

  • Read all of the last sentence. Preferred stock "reduces your risk", and you pay a price for that. Commented Jul 13, 2019 at 10:01

1 Answer 1


Preferred stocks are a hybrid security with characteristics of both bonds and common stock. The majority of preferred stocks issued in the U.S. have a $25 par value, usually with no maturity date but callable in 5 years (I don't know if this is similar to Canadian Pfd stocks).

Like bonds, they make fixed payments (though a small number are floating rate issues) and they are sensitive to changes in interest rates, though usually less so than bonds.

When interest rates are low, bond and preferred stock buyers are willing to pay more for them than par. Doing so is based on the Yield To Maturity. As the call date gets closer, YTM decreases and investors begin to sell preferreds that are trading at a premium and price drifts toward par.

Your question asks:

Why do preferred stock limit your reward, if the company expands and increases its profits?

I'd ask in return:

Why would you buy or hold a $27 or $28 equity that on some date in the not too distant future, the issuer can call it and give you $25 for what you paid much more for or is worth much more?

If preferred stocks intrigue you, read Preferred Stock Investing by Doug K. Le Du

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