Why Preferred Stock?
I’ve noticed that some are wondering why Warren Buffett and UK Prime Minister Gordon Brown back buying preferred stock [preference shares, in the UK] rather than common stock which has voting privileges. Safety is the primary reason, as the “preferred” refers to the order of pay out of any profits. Holders of preferred stock have the first call on assets, while the common stock is last in the queque to get paid. In addition, the holders of common stock, with their voting privileges, are part of the problem.
By buying preferred stock, usually with warrants for common stock at a set price as part of the deal, the companies get the capital they need to continue in business, but it comes not just with strings, but chains attached – the holders of the preferred stock get paid first, so management had better toe the line and generate real profits, not just mess around to make the stock price higher.
A huge part of the part of the problem are the “paper profits”, actions that make the company look profitable, when in fact they aren’t. The increases are accounting tricks, not real capital movement. A lot of the money that is being “lost” never really existed outside of “creative” sets of accounting ledgers. People were buying stock at heavily inflated prices, not knowing that the real value of the companies hadn’t actually increased.
