Definitions:

Common Stock- A security that represents ownership in a corporation. It allows you to elect members of a Board of Directors and vote on corporate policy. This is the first type of stock a corporation would issue. Not all corporations issue preferred stock.

Preferred Stock- A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. It is usually associated with a dividend that must be paid before dividends to common shareholders (that’s us) and these shares do NOT have voting rights. The structure of preferred stock is specific to each corporation. It differs from common stock in that it contains characteristics of both debt (fixed dividends) and equity (appreciation potential). These shares are established by companies that already have common shares and is intended for investors who are more interested in income than capital appreciation- the same type of investors who may otherwise purchase bonds.

Advatages of Common Stock:

• Voting rights
• Outperform bonds and preferred shares in the long run
• Easy to manage without an expert
• Can be used for covered call writing
• Free information is easily accessible

Advantages of Preferred Stock:

• Preference over common shareholders in receiving dividends
• Preference over common shareholders with liquidation rights
• Dividend rights are often cumulative (if unpaid one year, it is made up at a later date)
• Most have a negotiated fixed dividend amount
• Many have a convertible feature wherein they can be traded for common shares
• Good compromise between common stocks and bonds

Practical Application:

It is relatively easy to access both fundamental and technical information when evaluating common shares. The first half of Cashing in on Covered Calls is devoted to this subject. This is not the case with preferred shares. First of all, there is no official preferred stock rating system as there is with bonds. You need to understand if the company is financially healthy and where it stands with respect to cash. We need to know that it has the cash to pay us those dividends. To evaluate this, we  look at the company’s financial ratios like the interest coverage ratio. This will tell us how easily as company can pay interest on outstanding debt. A free site that will give some information related to this subject is:

www.quantumonline.com

Furthermore, symbols are tricky, data is hard to locate and many brokers do not specialize in this area. For most retail investors interested in investing in preferred shares locating a broker knowledgeable in this arena may be the safest route to take . Schwab (www.schwab.com) has a good reputation in this regard.

Conclusion:

One of the mission statements of Blue Collar Investing is to be (more than) well-informed before investing your hard-earned money. Whether you are writing covered calls, purchasing preferred shares, equities or bonds, you must know and understand the product and the risks associated with them. Covered call writing is my passion but preferred shares offer a hybrid investment between stocks and bonds that may be appropriate for some investors.

How to locate a list of preferred stock from the IBD website:

IBD- Get Preferred Stock List 

1- Go to IBD Homepage (www.investors.com) 

2- Look to “My Routine” Box on upper right 

3- If “other IBD data” is not in this box, click on “modify” 

4- Move “other IBD data” from “categories box” to “my routine” box 

5- Click on “other IBD data” 

6- Click on “futures options and other data” 

7- Scroll down to list of preferred stock 

8- Use the magnifier at the top toolbar to increase the size of the print (I use 400x)

IBD Industry-Sector List:

Several of our readers have asked about diversifying by sector rather than by industry. This will definitely make your portfolio better diversified in that the equities will be less correlated. However, locating enough stocks for your portfolio could be a challenge. Here is a link to the conversion list taken directly from the IBD newspaper: 

ibd-industry-sector-list

You may want to print this list and keep it with your research materials and then use the back arrow to return to this article. 

CTSH:

I have received a lot of email (success stories) about this equity since I started highlighting it two months ago. Here is the current chart:

CTSH as of 10-9-09

We see a gorgeous moving average indicator with mixed confirming (MACD Histogram and slow stochastics). Because of the early November ER, I will step out of this one and re-evaluate it for the December contracts.

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Discount Coupons:

For those who haven’t received discount coupons, email directly to me @:

alan@thebluecollarinvestor.com

Just put in the header, “discount coupon.” A 20% off coupon code good for all DVDs, CDs and the Companion Workbook will be emailed to you.

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An invitation to join my mailing list and be the first to learn of new products, additional discounts and upcoming seminars:

http://www.thebluecollarinvestor.com/joinfrnds.shtml

Last Weeks Economic News:

A mixed bag of reports as usual this past week. The negatives:

• Flat total trade volumes (exports and imports)
• Consumer credit from credit cards and loans fell for the 7th straight month. Increased savings seems to be restraining economic growth.

The positives:

• The Institute for Supply Management (ISM) reported that the Service Sector activity rose above 50, a sign of economic expansion. Last week the manufacturing industry was above 50 for the second consecutive month
• For the week, the S&P 500 was up 4.5%, for a year-to-date return of 21%

Video now playing on the homepage:

Selling Covered Calls- Parts 1 and 2

REMEMBER: We have 5 trading days until expiration Friday and Earnings Season is upon us.

My best to all,

Alan (alan@thebluecollarinvestor.com)