Investor Trading

In many cases there is written into the articles of incorporation a regulation which obliges the purchase and retirement of a certain number of

preferred shares annually. This is known as a “sinking fund” provision. The corporation sets aside from its earnings each year a certain amount, say $50,000, and it is required to redeem preferred shares in that amount by exercising the right of call at a specified price. As a rule, the selection of such shares is made by lot. To the investor who may be anxious to preserve his investment in its entirety, this calling of shares for redemption may be annoying; but there is some compensation in the fact that the retirement of some shares reduces the number of shares outstanding and therefore tends to increase the assets behind those which remain; in addition, there will be some tendency to stabilize the price of those remaining, because the shares which are called for redemption are permanently removed from the market.
Investment in preferred stocks may have a number of merits. Chief among them is a reasonable regularity of income coupled with a reasonable safety of principal, since the preferred stockholder is assured of certain rights with respect to the latter. The rate of return on preferred stocks is often slightly higher than that which may be obtained on good-quality bonds. In addition, the high-grade preferred have always shown considerable resistance to market fluctuations. It is to be noted that the better quality preferred stocks are now eagerly sought by insurance companies, trustees, endowment funds, and the like. We hasten to add, however, that all preferred stocks are not alike in quality, so that careful investigation should be made and investment confined only to upper-grade issues.
Those who argue against investment in preferred stocks point out the following features: (a) there is limited return although considerable risks of ownership are borne; (b) there is no enforceable right to dividends, since these must be declared by the board of directors and they may pass one or more dividends at their discretion; (c) the owner of a preferred stock is in a position midway between that of a bondholder (creditor) and that of a common stockholder (partner), so that his stock is “neither fish nor
fowl” and his position may eventually prove to be an uncomfortable one.