Do preferred shares also decline in a recession?

Question

I'm new to the world of preferred stocks. These shares usually trade very near their callable value, typically $25. But what happens in a bear market? Do they tend to stay near $25, or do they decline along with the common stock?

Answer 1

Preferred shares are normally purchased for current income, as opposed to common stocks, which are normally purchased for capital appreciation. In a recession, interest rates will usually decline, so that a preferred stock, with a fixed dividend will (like a bond) rise in value in order to reduce its yield on the pruchase price. The preferred's price will be affected more by the price movements of bonds than by the price movements of its issuer's common stock.
Keep in mind that almost all preferred issues have a call price after a certain date, and can then be taken off the market when it is to the issuer's benefit to do so.

Answer 2

Recession or not, preferred shares can decline. The market sets the prices and those prices can fluctuate in ways not always obvious. A big reason for preferred stocks to decline, recession or boom years, is because the interest rates have risen. The preferred stocks sell at a preset rate, so if you want to buy that instead of put your money in the bank, you will only be willing to buy if the price were low enough so that the effective return, or yield, is at an acceptable level to accept the risk (risk that the price would fall further and you would lose principle, risk that the economy would tank and here you could have had the money insured by the FDIC but you risked it in the stock market instead).

The biggest reason that preferred shares can decline, recession or not, is that someone is more interested in selling, so buyers sit back and say, how interested are you in selling? At that point, a lull in the market coupled with a motivated seller (gotta pay my taxes, so I'm selling to get cash; gotta buy that boat so I'm selling to get cash; grandpa died and 18-yr old niece who inherited the shares wants cash, not stocks) is at the mercy of a less than motivated buyer (hmm, 40,000 shares at market, 10,000 market buy orders, lets place a buy order, but for a buck or two less and see if they go for it, voila! I got 30,000 shares at a $30-60,000 discount!). If folks aren't interested in buying (hard times, money is tight) then folks who are interested in selling have to sell on the cheap. But then the same thing happens when someone says, "Preferred stocks? There's not as much fluctuation in them, I'll look for rockets (to go long) or rocks (to sell short)". So even in good times, preferreds can fall because people sell when there aren't buyers excited to buy.

Answer 3

You have two good answers, but they did not mention one important item. During a recession many companies can find themselves in extreme financial difficulty. If the company that has issued the preferred shares finds itself in financial difficulty, the prefered shares will drop dramatically in price.