The Capital Markets by Gary Strumeyer & Sarah Swammy

Author:Gary Strumeyer & Sarah Swammy
Language: eng
Format: epub
ISBN: 9781119220565
Publisher: Wiley
Published: 2017-02-21T00:00:00+00:00

CONCLUSION

Preferred stocks are similar to bonds in that there is a fixed or variable payment to the holder backed by the earning power and cash flow of the issuing corporation. There are a number of factors that can affect the price of a preferred, including the direction of interest rates, the creditworthiness of the issuer, the structural features and tax implications of an individual issue, and the liquidity of a given issue. Corporations are large buyers of perpetual domestic issues due to the favorable tax treatment of the dividends. They can realize after‐tax yields significantly higher than fully taxable investments.

While preferred stocks have historically been purchased primarily by institutions, the emergence of the $25 par security changed the landscape dramatically. The $25 per‐share price comes in a variety of forms and requires less of an investment commitment for the individual investor. Combine this retail‐friendly issuance denomination with the price transparency for exchanged‐traded issues (most larger, well‐capitalized issuers have their preferred stock listed), relatively low transaction costs, favorable tax treatment on many forms of issuance, and high dividend yields, and we have a fixed‐income product well‐suited to the retail fixed‐income investor.

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