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How to Invest for Income – Consider Preferred shares

It can be difficult for investors to find more income in a world where many investments are now paying close to zero percent returns.

Preferred shares are an interesting diversification for any investment portfolio that are often overlooked.

Preferred shares also go by the name of “preferred stock” or “preference shares”.

Preferred stock usually carries no voting rights, but usually pay a dividend. The term “preferred” is applied because this class of shares has rights that are above those of ordinary stock.

There are both advantages and disadvantages to preferred shares.

Advantages

– A higher yield than an ordinary stock – preferred shares are routinely paying around 6-7% yield

– Preferred shares dividends must be paid in full before any dividends are paid to ordinary shares

– In the event of a corporate bankruptcy, preferred shares are ahead of common shareholders – although in reality if a company is liquidated it is rare for preference shareholders to receive any substantial return of capital

– In a volatile market, preferred shares tend to drop less in value when a market declines

Disadvantages

– Preferred share values are similar to bonds in that they are sensitive to interest rates changes . Ie – If interest rates go up, then share valuations of preferred stocks will usually decline (and vice versa). This is due to the fixed nature of the preferred shares dividends

– Unlike bonds, preferred shares do not have a maturity date so the holder will not receive a return of the investment principle at the end of a given time. This means in a period of high and increasing interest rates, the value of preferred shares will continue to decline.

When to hold Preferred Stocks

Preferred stocks should be part of a well diversified income portfolio. These should combine with a laddered bond portfolio of differing maturity dates, risk and yields.

How to invest in Preferred Stocks

There are two choices when investing in preferred shares. Either preferred shares in individual companies can be held, or alternatively ETF’s can be used to hold a basket of preferred stocks with minimum administration. A good example of this is the iShares S&P US Pref Stock Idx Fnd (ETF) which goes by the trading symbol “PFF”.

Accountants Ongar – Transform AccountingEssex Accountants

Disclaimer – The information presented in this article is intended for education purposes and is not intended to be used as the sole basis for any investment decision nor should it be construed as advice intended to meet the investment needs of any investor. The author may hold positions referred to in this article. Please perform your own research or contact a qualified financial adviser prior to making any investment decisions.

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Investment tips – Why Position Sizing is key to any investment portfolio

An individual investment portfolio will at any time be comprised of a number of positions, and usually an element of cash waiting on the side lines for investing opportunities.

But when you have a conviction for an investment opportunity, have completed your research and are ready to put on a trade, all investors are faced with the question of how large a position to take in any single investment.

How you size your stock trading position can be equally as important than the actual trades you make.

If your position size is wrong by being too large, even if your investment conviction (ie – the reason why you decided to make the investment in the first place) is right you may get knocked out of your trade too early if you suffer some short term volatility and close the position out.

When it comes to investment position sizing, you have to be in your comfort zone, because if you are not then fear will dominate your trades causing you to miss out on potential upsides if your convictions turn out to be correct.

One thing that many investors do wrong when handling their own portfolio is to put on an individual investment in a bigger position than they are comfortable with and because of that they can be right on the conviction, but if the position goes against them in the short term they panic and get out of the trade prematurely and miss out on the upside.

Getting position trading right is a fundamental key to successful individual investing. A smaller position in a high beta stock means that the investor is more comfortable and feels able to live with short term fluctuations, allowing them to stay with their position longer and to follow the investment idea through with greater conviction.

It is a generally held consensus that portfolios should not exceed 2-5% in any one position.

Of course, the investment world is always made up of conflicting opinions, and every individual circumstance and risk appetite is different.

Many successful individual investors would balance their portfolios with larger positions in lower risk stocks (eg – utilities, world dominating dividend paying stocks etc) and much smaller positions in more volatile but potentially lucrative growth high beta stocks, allowing them to feel comfortable with setting higher stop losses and riding out short term fluctuations.

Small Business Accountant ChelmsfordTransform AccountingEssex Small Business Accountants

Disclaimer – The information presented in this article is intended for education purposes and is not intended to be used as the sole basis for any investment decision nor should it be construed as advice intended to meet the investment needs of any investor. The author may hold positions referred to in this article. Please perform your own research or contact a qualified financial adviser prior to making any investment decisions.

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