Everything You Wanted to Know About Preferred Stock

preferred-stock-business-918x516Once upon a time, preferred stocks were a popular investment with companies and investors. Combining elements of debt and equity, preferred stock was an ideal issue for businesses that lacked the physical assets to collateralize debt or could not attract common stock buyers.
 
In order to appeal to new investors, companies sweetened the pot by issuing a new security – preferred stock – that had less risk and a greater certainty of income than common stock. If a company falters and requires liquidation, the debt holders are paid in full first, followed by payment to the preferred stock holders in an amount equal to the liquidation value of the preferred stock (established at the time of the initial offering). Common stock shareholders then receive any cash remaining. Preferred shareholders receive full payment of their investment before common shareholders receive any payment. Similarly, preferred shareholders receive dividends before any common stock dividends are paid.
 
The first preferred stocks were issued by railroad companies and canals in the mid-1800s. Today, preferred stocks are more often issued by entrepreneurial startup companies, organizations in dire financial circumstances that are precluded from traditional debt and equity, or financial companies and utilities. In recent years, preferred stocks have fallen out of favor as investors have turned to common stocks or bonds – but there are a few notable exceptions.
 
Billionaire investor Warren Buffett is especially active in preferred stocks, usually in combination with attached stock warrants – a legal right to purchase common stock from the company for a defined price. In other words, a share of preferred stock might have a warrant giving the preferred shareholder the right to purchase a share of common stock for a fixed price for a specific term of time. In 2008, Buffett publicly invested $5 billion in a private Goldman Sachs preferred issue with a 10% dividend and warrants to buy $5 billion of stock at $115 per share (43.4 million shares). Other notable preferred stock purchases by Buffett include the holding company that owns H.J.Heinz, Bank of America, General Electric, and Burger King.
 
Investment grade preferred stocks with current yields between 5.2% and 6.5% have particular appeal to investors seeking high income, especially with current rates from high-quality bonds averaging yields between 1.7% and 3.0%. However, preferred stocks can be complicated, depending upon their composition, and are not for everyone.

Key Features of Preferred Stock

A Hybrid Security

Preferred stocks combine features of equity and debt:
 
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Turning Point – Free Trade or Protectionism

free tradeThe debate about free trade versus protective tariffs (taxes) has raged for centuries. However, it has become especially virulent as industrialized countries lose an increasing amount of jobs to emerging nations. Free traders, worried about the possibility of new tariffs to protect native industries, predict a trade apocalypse. Reported by TIME, Robert Zoellick, president of the World Bank, claimed, “If we start to trigger a round of protectionism, as you saw in the 1930s, it could deepen the world crisis.”
 
Proponents of free trade – including many economists – claim that the benefits of lower prices far outweigh the costs of lower incomes and displaced workers. Professor of Economics Alan Binder, writing in the Library of Economics and Liberty, claims that a country’s wage level depends not upon its trade policy, but its productivity: “As long as American workers remain more skilled and better educated, work with more capital, and use superior technology, they will continue to earn higher wages than their Chinese counterparts.”
 
Opponents of free trade disagree. Senator Bernie Sanders of Vermont has consistently voted against trade agreements, including the North American Free Trade Agreement (NAFTA). He argues that trade agreements have encouraged corporations that seek low-income labor and fewer regulations to close factories and ship jobs overseas. According to the senator on Fox News, “Over the years, we [America] have lost millions of decent-paying jobs. These trade agreements have forced wages down in America so the average worker in America today is working longer hours for lower wages.”
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Understanding the history of tariffs and free trade, especially in the United States, is necessary to evaluate the effects of NAFTA and the proposed Trans-Pacific Partnership (TPP). Two other major trade agreements are also being discussed – The Transatlantic Trade and Investment Partnership (TTIP) and the China Bilateral Investment Treaty (BIT) – which could have global ramifications as well.

Tariffs and Free Trade in the 20th Century

By the end of World War I, advocates of high tariffs recognized that tariffs weren’t the most important source of government revenues and so adopted an alternative argument. There was the widespread belief that tariffs benefited the wealthy while raising the cost of goods for other Americans. As a consequence, protectionists justified tariffs primarily as a way to promote employment for citizens of their country. This argument coincided with a growing concern that inexpensive foreign goods would destroy domestic manufacturers and lead to widespread unemployment.
 
After World War I, economic nationalism and protectionism dominated world trade with countries creating new taxes on foreign goods to protect native industries and maintain full employment of their citizens. As the global economy shrank, countries retreated behind the new tariffs and trade blocks to protect native industries until after World War II.
 
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What are Binary Options?

gamblingIn early 2004, 32-year-old Englishman Ashley Revell sold everything he owned – furniture, clothes, car, golf clubs, and his old cricket bat – to raise almost £76,840, or the equivalent of approximately $140,617 in U.S. currency (per the average 2004 exchange rate). On April 11, 2004, Revell walked up to a Las Vegas roulette table and placed his entire fortune on the color red.
 
Roulette, named after the French word meaning “little wheel,” is played with a small ball and a wooden wheel with 38 slots or pockets for the ball to rest in. In American roulette, 18 slots are red with odd numbers, and 18 slots are black with even numbers. Also, two slots are green and marked as “0” and “00.” The game begins when the dealer (croupier) spins the wheel in one direction, then spins the ball in the opposite direction. Winning or losing is based upon the slot in which the ball finally comes to rest.
 
The odds of picking the correct color are 38 to 18, or 47.4%. In other words, Revell’s chance of winning was less than the odds or a single coin flip. Fortunately for him, the call came to rest on a red pocket. Revell won £153,680, doubling his money in less than 20 seconds.
 
According to the Binary Option Brokers Association, online gaming companies had searched for years to find a product that was “easy to trade, highly rewarding, and tied to financial markets.” The solution: Binary options—also known as “all or nothing” or “high-low” options—which give investors an opportunity to play the market similar to sports betting and roulette.
 
Easy to understand, the more popular binary options provide almost instantaneous feedback and gratification. Binary options do not require ownership of the underlying asset, being simply wagers about price direction within a set time. According to CNBC, binary options have become increasingly popular with U.S. investors, despite critics who compare the option to “buying a lottery ticket.”
 
The options, available from European brokers for years, gained SEC approval in 2008. Binary options were first traded in the U.S. on the American Stock Exchange and subsequently by the Chicago Board of Options Exchange (CBOE). Today, binary options in the U.S. are primarily traded on the North American Derivatives Exchange (Nadex) or the Cantor Exchange (CX), each regulated by the Commodity Futures Trading Commission (CFTC).
 
According to Nadex, 5,000 contracts are traded daily on the exchange, and the popularity of binary trading is growing – volume on Nadex increased 64% in 2016, as the ability to trade minute-to-minute price movements in currencies, commodities, stock indexes, economic events, or the price of Bitcoin is irresistible to some people. Though a wide range of assets are tradeable on regulated exchanges in the U.S., binary options on individual securities are only available with foreign brokers.

Binary Options

Binary options are considered “exotic options” since they differ significantly from the highly regulated standardized call and put options traded on an exchange such as the CBOE, NASDAQ Options Market, or the NYSE Amex Market. Binary options are traded on exchanges and over-the-counter (OTC) around the world, including the United States. A binary option can be viewed as a wager on the direction of the market (or another underlying asset) within predetermined period of time.
 
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