The Zions Direct investment center consists of 13 licensed representatives who together take thousands of phone calls every month from individual investors. While each of these calls is unique, each month lends itself to over-arching themes patched together by common concerns. This piece is intended to bring together some of the more popular questions of the month and is brought to you by me, a Zions Direct representative who answers your calls on a daily basis. This past month, February, has brought questions surrounding preferred stock, housing bond risk and the execution of limit orders.
Question 1: What is a preferred stock?
At the end of January, Zions Direct held an auction for Zions Bancorporation Preferred G shares, which sparked many questions regarding the definition of a preferred stock. A preferred stock, like a common stock, is an equity security, but has a fixed dividend stream similar to the structure of a bond. The annual dividend, which is usually divided and paid out quarterly, can be calculated by multiplying the preferred stock rate by the face value of the preferred stock, typically $25. However, unlike a bond, if a preferred stock misses a payment the issuing firm does not necessarily risk bankruptcy. Instead, one of two things can happen: if the dividend is cumulative, a common feature for preferred stock, the dividend payment aggregates and should be paid in the future (assuming no other payment issues exist with the company); however, if the dividend is non-cumulative, it will be skipped entirely. In the order of seniority, preferred stock is junior to debt, but senior to common stock, so dividends to preferred stock holders will be paid before dividends to common stock holders.
When investing in preferred stock, investors should be aware of the call schedule for the stock. Preferred stock is issued without a maturity date, but a call date allows shares to be redeemed after a certain date. Also, preferred stock holders need to be aware of whether the rate paid is fixed, floating or a mix. A fixed rate will pay the same dividend over the entire life of the preferred stock, a floating rate will be tied to a major benchmark (such as a T-bill) allowing dividends to fluctuate, and a mixed rate preferred will have a fixed rate for a certain period of time and then switch to a floating rate afterwards.
Question 2: What additional risk should be considered when purchasing a housing bond?
When a government or municipality needs to raise funds for housing projects, it will issue a housing bond. The bond is typically backed by mortgage loan repayments. These bonds can be especially risky when mortgage rates are low, because borrowers may choose to refinance and pay off their mortgages early. In this event, there is greater potential that the bond will be called. When the bond is called, it will usually be for the face value of the bond, therefore posing even greater risk for investors who purchased a housing bond at a premium (meaning they paid more than 100% of the face value of the bond). This risk should be considered in addition to other standard risks that bonds pose, such as ability of the issuer to pay and interest rate risk.
Question 3: Why did my GTC limit order execute over different days?
Instead of placing an order which will execute at the current market price, an investor may choose to place a buy or a sell order for a stock with a limit price. The limit price allows the order to either fill at the stated price or better, or not at all. An investor can choose to leave his or her order open for either just one day (until market close) or for 120 days, known as a good-till-cancel (GTC) order.
When limit orders are GTC, there can be confusion as to why part of the order executed on one day, and the rest of the order either remains open (unfilled) or executes on another day within the allotted time frame. The case is simply that not all of the investor’s shares could be filled at his or her stated limit price on that particular day. Some investors do not like this aspect of placing a limit order as it can result in only a partial fill or trigger multiple commissions. This can be avoided by placing an all-or-none (AON) stipulation on an order, which mandates that either the entire order must be filled or none of it. Of course, the risk with AON is that the order cannot fill unless there are enough shares to execute the entire order, so weigh your options carefully before determining which strategy is best for you.
Hopefully sharing questions from other investors incites you to ask some of your own. Please don’t hesitate to call our investment center at 1-800-524-8875 where we are here to assist you Monday through Friday 6 a.m. to 10 p.m. MT and Saturdays 9 a.m. to 3 p.m. MT.
Savannah Wade is a registered representative of Zions Direct.
Investment products and services offered through Zions Direct, member of FINRA/SIPC.