debt
What value is value?
One of the great marketing tools for stocks is the promise that there is a product that will work for every investor. Companies, brokerage firms, and mutual fund houses are constantly putting out new products to sell to discouraged investors. Financial professionals never miss an opportunity to sell a gullible investor a stock. They have invented a wrench to fit every nut.
No stock style or category eliminates the basic problem with stocks. Style is supposed to take the sting out of investing. Unfortunately, all stocks, regardless of category, are subject to the whims of the herd.
Utility stocks are marketed as steady income vehicles akin to Treasury bonds, yet they are often as volatile as tech stocks. Utility stock prices were cut in half when Three Mile Island threatened to ruin the power business.
They were whacked again when deregulation eliminated their monopoly position in many markets. Recently, increased gas prices sent the once steady and reliable PG&E into bankruptcy and put Southern California Edison on the brink of bankruptcy.
Each type of stock creates its own emotional complexities. Preferred stock was one of the marketer’s first products. When common stock investors realized that in financial stress, the company canceled dividends but paid bond interest, they sold stock and bought bonds. Companies then began to issue preferred stock with fixed dividends. Preferred stock dividends are paid when a company is in stress, but in bankruptcy, preferred stock is canceled, the same as common stock. Few investors are comfortable with this netherworld between bonds and stocks. The complexity of determining how to value preferred stock keeps many investors away. These days stock is considered a pure capital gains vehicle and bonds are used for income.
Introduction to Professional Advice Blog
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