Cost of Preferred Stock

Preferred stocks are those stocks which bring additional advantage to the investor when he/she holds it. It is also termed as opportunity cost. Preferred stock is also called as preference share, preferred shares or preferred. There are a huge difference common stocks and preferred stocks. The preferred stock holders have some advantages over the common stock holders. Some of the advantages are,

•  They are the one who gets the dividend first. The common stock holders get the dividend only after the preference share holders are paid their dividend.
•  In case of wind up of the company they are the one who get the settlement first. The fund raised by selling of the assets is paid first to the preference share holders.
•  It is almost like a mix up of equity and bonds together. The advantages in both equity and bonds are found in this kind of shares.

Now let us see the cost of preferred stock from a company point of view.
It is nothing but the cost that the company pays inform of dividend for the fund it raised through the issuance of preference shares. Cost of preferred share is the ratio of the dividend it gives to the issuance price. It can also be termed as the ratio of the fund it pays as dividend as a whole to the fund it raised by issuing preference share. It can be also states as the interest rate as it is almost similar to paying interest rate.

Now let us see the cost of preferred stock from an investor point of view.

The preference share is also sold in market just like common stock. The cost the investor has to pay for the purchase of the preferred stock is termed as the cost of preferred stock from an investor point of view. In general preferred stock usually trade at a higher rate than compared to common stock this is because the positive factors associated with such stocks are more than compared to common stocks.   

Some of the disadvantages in holding preferred stocks are,

• They have no voting rights.
• The appreciation of preferred stock in market is not that good as compared to common stock.

Question

• Define cost of preferred stock from a investor point of view?
• What are the various opportunity cost in holding preferred stock?