A kiss on the hand may be quite continental, but preferred stocks can be an investor's best friend. If you're not familiar with this type of security, its characteristics are a cross between a common stock and a bond. For years, large institutions were the biggest investors in traditional preferred stock, although new twists on the old formula of preferreds are making them more accessible and more interesting to individual investors.
Like common stock, preferred stock represents ownership in a corporation. On a company's balance sheet, it appears under the "equity" section. Unlike common stock, however, preferred stock may pay a set dividend--similar to bonds that pay a set interest payment. If a company's assets are liquidated, preferred stockholders are usually paid before common stockholders, but after debt holders, making preferred stock more attractive to safety-conscious investors than common stock (though less secure than bonds).
Preferred stocks are rated by Moody's and Standard & Poor to give you a sound basis upon which to judge their quality. Preferred stocks usually have higher dividends than their common cousins, making them more attractive to those looking for Mr. Yieldbar. Yet, as the name suggests, preferred stock is not for everyone.
On the downside, like any fixed-income security, many preferreds offer little protection from inflation. If interest rates rise, though you'll continue to receive fixed payments, your purchasing power will decrease. Higher interest rates are usually no fun for fixed-income investments of any kind, especially since the price of your stock will probably fall as well, adding insult to injury.
Of course, this scenario isn't a problem if you intend to hold your position, but should you decide to sell, you may run into another problem: illiquidity. Preferred stock issues are not as widely traded as common stock, so there may be a significant spread between the asking and bid price.
Despite these faults, income-oriented individual investors and corporations alike still find preferred stock attractive. The secret is to know what you're doing.