Investing in preferred stock is a great option for those who wish to own shares in a company, but don’t want to experience the risks that common stocks often present. However, they’re not the best choice for every investor. As preferred stocks are rated in a similar manner to bonds, it’s crucial to gain all important information about a company prior to investing. Your broker and investment firm are responsible for presenting all the facts and recommending opportunities that fit your financial goals.

Unfortunately, in many situations, investors are misled by their broker and firm. As an investor, you trust your broker and their firm to adequately handle your investments, as well as relay professional and accurate information tailored to your situation. When your broker and firm have taken advantage of your trust, resulting in losses, it’s crucial to speak with a securities fraud attorney. At Oakes & Fosher, LLC, we have extensive experience in a variety of preferred stock fraud cases, and can help you determine whether you have grounds for a claim. Contact us today for a consultation.

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What Are Preferred Securities?

Preferred shareholders have a class of ownership in a company and take priority when it comes to dividends. Since preferred shares are higher in structure, investors are offered greater protection in the event that the company goes bankrupt. They are traditionally advertised to income-seeking investors, who are drawn to their dividend payment returns.

Also referred to as hybrid investments, preferred stocks possess characteristics of both debt and equity. Similar to traditional debt, preferred stocks carry priority over common stock for dividend payments and bankruptcy proceedings. Additionally, preferred shares offer a fixed dividend payment similar to bonds.

On the other hand, preferred stock is similar to equity in that their value can fluctuate, especially when the issuing firm’s value is low. Further, preferred shares are given ratings like bonds, but are almost always lower due to a difference in interest payment guarantees. Since they are complex investments, it’s important that your portfolio be carefully curated to avoid any risk.

Types of Preferred Stock

Four main types of preferred stock can be issued by a company. Licensed brokers should inform their investors about each type in detail as they relate to personal portfolios. They include:

  • Participating preferred stock: Those with this type of preferred stock can receive higher-than-average dividends if the company experiences a higher-than-average profit.
  • Convertible shares: Investors with convertible preferred securities can convert their investments into a specified number of common shares.
  • Cumulative preferred stock: If a company skips dividend payments during a less profitable period, investors with cumulative preferred stock reserve the right to accumulate the skipped payments and take priority when they resume.
  • Non-cumulative preferred stock: The opposite of cumulative preferred stock, those with non-cumulative shares won’t receive skipped dividend payments.

Preferred Stock Risk

Just as it is a broker’s responsibility to inform you of preferred stock benefits, so too must they warn you of the risks. Although marketed as a stock with fixed income similar to that of bonds, in times of market crisis, preferred shares act more like common stock. As a result, investors with preferred stock miss the upward price increase that common stocks present, but are exposed to the downward declines.

Additionally, many preferred stocks are callable, meaning that the issuer can repurchase the shares at par value and cease dividend payments. Further, if interest rates fall in a volatile market, companies have an incentive to call the security, thus giving preferred shares an inherent interest rate risk.

The threat of industry sector concentration is also present with preferred stocks. Since regulated companies, such as those in the financial or insurance sectors, can carry preferred shares as equity on their balance sheet, many choose to issue preferred shares rather than traditional debt. Moreover, they issue preferred stocks in bulk to raise large amounts of capital. As these institutions are highly susceptible to the changing market conditions, it’s crucial that your portfolio is constructed in such a way that the risk is mitigated.

Preferred Stock Fraud

Preferred stocks are complex, and differ from one company to the next. As an investor, it’s crucial that you’re given all available information about the company, including both the risks and benefits of their preferred shares, before investing. Brokers frequently mislead their clients by only relaying a portion of the truth or promising large returns when the outcome is uncertain.

Additionally, it’s common for firms to recommend preferred stocks that don’t suit a client’s financial situation or needs. Some brokers fail to diversify their clients’ portfolios, meaning they allocate a majority of the available funds to one particular type of investment. Others portray preferred shares as a safe investment, even falsely stating that they are government backed.

How Our Securities Fraud Attorneys Can Help

Any situation where your financial advisor recommended a portfolio concentrated with preferred stocks and you incurred damages as a result, you may be able to recover your losses with the assistance of an experienced securities fraud attorney. If your broker has failed to inform you of the necessary information prior to recommending a preferred stock, filing an arbitration claim is the best course of action. Our attorneys’ comprehensive knowledge and experience within securities law means we are capable of helping you navigate through even the most complex of cases.

We’re dedicated to representing harmed investors like you in arbitration proceedings before the Financial Industry Regulatory Authority (FINRA). Since FINRA arbitration is complex, it’s important that your securities fraud lawyers are well versed in all proceedings, forums, and methods of proper prosecution. Our preferred stock fraud attorneys have extensive knowledge of securities arbitration laws, and we’ll help develop a strong strategy aimed to recover your full losses.

Recover Your Losses With a Trusted Preferred Stock Fraud Attorney

If your portfolio has suffered damages due to your broker’s ill advised preferred stock recommendations, you may have grounds for a claim. The attorneys of Oakes & Fosher, LLC have years of experience in securities fraud arbitration, and will provide the highest quality legal services possible. It’s our priority to ensure you receive the compensation to which you’re entitled. Contact us today to discuss your case.