-- Q: A company just made me sell my preferred stock back to them. Is that legal?
A: It seems so unfair. Here you were happily collecting a fat dividend from shares of preferred stock, when, suddenly, the company bought them back. Is that legal? Absolutely.
Preferred stock is one of the least understood investments investors have recently gotten interested in, largely due to the nice income these investments typically generate.
Preferred stocks share some traits with regular common stock and some with bonds. Preferred stocks, like bonds, pay a routine prearranged payment to investors. However, more like stocks and unlike bonds, companies may suspend these payments at any time.
Preferred stocks oftentimes share another trait with many bonds — the call feature. The company that sold you the preferred stock can usually, but not always, force you to sell the shares back at a predetermined price. Companies might choose to call preferred stock if the interest rates they're paying are significantly higher than the going rate in the market.
Notice that I said some preferred stocks, but not all, have call provisions. It's imperative when you buy shares of preferred stock to check the prospectus to see if there is a call provision.
If there is, you need to be aware of it. If interest rates are falling, the odds your preferred stock will be called can dramatically increase.
If you're going to invest in preferred stock, know that the risk of having the security called by the company that issued it is a significant one.
You might find yourself suddenly losing a lucrative stream of cash and forced to settle for an investment with a much lower yield.
Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies and Fundamental Analysis for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at firstname.lastname@example.org. Follow Matt on Twitter at: twitter.com/mattkrantz