Preferred Stock

Preferred securities are a mix of debt and equity investments. They offer a fixed dividend payment similar to bonds but they can fluctuate in value. Preferred stocks are typically marketed to investors who are averse to risk and looking for dividend income rather than capital gain. While preferred securities do not experience upward price swings in the way that common stock does, when the value of the issuing firm is low, the value of a preferred stock may be affected leaving investors exposed to declines in their investment.

Investors who have a high concentration of preferred securities at the advice of their financial advisor may have experienced a sharp drop in the value of their portfolio. It's been estimated that nearly 72 percent of all preferred stocks are issued by the banking, insurance or other financial service industries—and, therefore, in addition to an investor having their portfolio weighted heavily in preferred stocks as an investment tool, the portfolio may lack enough industry diversification to guard against negative market fluctuations, thereby losing significant value. If their financial advisor failed to adequately diversify the investor's portfolio, the investor may be able to recover money lost when their preferred securities lost value.

Some lawsuits have been filed against companies that sold preferred securities. In 2008, an investor filed a lawsuit against Wall Street Firms that underwrote Lehman Brothers Holdings Inc preferred stock. The lawsuit alleged that the firms, which included subsidiaries of Bank of America, Citigroup and Merrill Lynch & Co, misled investors about Lehman's financial health.

According to the lawsuit, the stock dropped from a high of $25.55 to 10 cents as of September 2008.

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Last updated on May-9-11