Uncommon Valor

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).