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investing 101Preferred shares: uncommon values
Aiming for a realistic return
Identifying your real risks
Putting together the right portfolio
The psychology of investing
Investing for growth
Seven questions to ask before buying a growth stock
How to spot value
Selecting stocks for income
How to buy bonds
Preferred shares: uncommon values
Convertibles: the best of both worlds
Closed-end funds: their time will come again
The right way to use stock options
Mergers and acquisitions
Frequently asked questions I
Frequently asked questions II
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Uncovering one of the best-kept secrets in fixed income.

Among income investments, one of the best deals often goes unrecognized -- preferred shares. The reason they can be such a good deal has to do with the way corporate balance sheets are put together. All corporations are financed with equity, represented by common stock. Most also borrow money, usually by selling bonds. The bonds have first claim on the company's assets, so they're the safest investment. But any increase in the company's value goes to the equity.

Preferred stock is a third category, falling between common stock and bonds. Preferreds have a stronger claim on company assets than common shares do, making them a safer investment. And like bonds, preferreds have a fixed payout, with yields on many high-quality issues running more than 8 percent. In addition, they're far more convenient than bonds, particularly for individual investors with limited funds. Most preferreds trade for around $25 a share, so you can buy a 100-share round lot for $2,500. It's generally thought that you need at least $10,000 to buy individual bonds efficiently.

Preferreds do have a couple of drawbacks. Unlike common stock, they barely benefit from increases in the company's value. Second, preferreds often can be called -- that is, redeemed -- within a few years. If you pay more than face value for a preferred, and it's called, you'll face an immediate loss. Many preferreds are callable within four years of the date they're issued.

To lessen your call risk, you can buy recently issued preferreds. You also can look for unusual issues with greater protection. Some Merrill Lynch issues, for instance, aren't callable for up to eight years. Or, you can buy preferreds selling for less than face value -- it's not so bad to be called at $25 if you only paid $22.

Not all companies issue preferred stock. And since there are so many variables to consider, there may only be a handful worth buying at any particular time. So you'd be smart to buy them through a knowledgeable broker, which probably means someone at a giant, full-service brokerage with a large staff of analysts. But even though top preferreds are hard to track down, they're worth the hunt. One or two well-chosen issues can be the perfect income additions for a broadly diversified portfolio.

Convertibles: the best of both worlds >>


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