There are two basic types of investments: stocks and bonds. Bonds represent debt, and stocks represent ownership. Preferred stock represents a little bit of both. Retractable preferred shares allow the owner to sell the share back to the issuer at a set price.
Preferred stock is considered to be a hybrid form of debt as investors are paid a dividend that pays more like interest on a bond than dividends on stocks. Additionally, preferred shareholders are not allowed to vote like common stock shareholders.
Investors make money from preferred shares through the semiannual dividend paid out. It is usually quoted as an interest rate. For instance, preferred stock paying 10 percent will pay $5 every six months on a $100 investment.
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At the end of a certain period, the company pays the investor back the principal. The return is therefore the dividend paid on the interest.
Interest rates are the main drivers of pricing for preferred shares. As interest rates go up, investors can earn more money on their money, and the price of preferred shares paying less interest goes down. This is not the case for retractable preferred shares.
Retractable preferred shares allow investors to redeem the shares whenever they want. As a result, the pricing on retractable preferred shares tends to remain flat and above the normal pricing level; that is, these shares sell for a premium due to the reduced risk created by the option to redeem the preferred shares at any time.
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