Thursday, July 4, 2013

Short Answers to Unanswered Questions: Preferred Shares and Other Things


Dear Investor Juan,

Am a regular reader of your blog and while you have some articles there regarding preferred shares, I would like to ask the following regarding the dividend rates that goes with the issuance of these shares:
  • How does one company determine the dividend rates for these preferred shares? 
  • What do they use as basis for the dividend rates?
  • Do public companies have different basis for the dividend rates being offered ("as sweetener") vs.private, non-listed companies (if they wish to issue preferred shares to existing stockholders)?
Would appreciate if you can share your insights on the above matter.

Thank you and more power,


Dear Vic,

Here are my answers to your questions.

Firms issue preferred stock to raise money to finance projects or other uses. It's like a more expensive alternative to borrowing. The dividend rate on preferred stock is primarily determined by the market: the dividend yield on outstanding preferred shares issued by companies of the same risk serves as a benchmark. The dividend rate also reflects how much return investors are demanding for lending out their funds.

I'm not so sure about my answer to your last question because I'm not very familiar with preferred stock issues by private companies (as I think they are quite rare), but these should have a higher dividend rate than preferred stock issued by a listed company in the same industry and of the same size because of the following reasons:
  • An unlisted firm would be subject to less stringent reporting requirements, and would be less transparent, and thus riskier, in the eyes of investors.
  • Preferred shares of an unlisted firm would not be tradable in exchanges, and this lack of liquidity would prompt investors to demand a higher return.


Dear Investor Juan,

I would like some advise on investing in BDO UITFs. I am currently a college student and really interested in investing at an early age. I am willing to invest about more than 10K in a BDO UITF product. Could you please explain to me the ff.:

1) The fees/charges I have to pay in investing in BDO's UITF.
2) Do you recommend this EIP Program by BDO?
3) Is 10K enough to start investing?

Thank you. 


Dear Louie,

I would only suggest investing in an equity fund if you don't have any debt, you already have an emergency fund, and you can afford to invest long-term. So if all these conditions are met, then here are my answers to your questions:

1) You don't have to pay anything. All fees and taxes are automatically deducted and paid from the fund's assets and are already reflected by the fund's NAVPU.
2) I'm okay with enrolling in an automatic investment scheme. Deciding which bank you would buy a UITF from is all up to you.
3) Yes.

Good luck!


Dear Investor Juan,

Got any good recommendations for a first credit card? I really need to get one soon.


Dear Marvin,

Local bank credit cards have lower interest than foreign bank credit cards, so I suggest that you just get one from a local bank that you already have an account with.

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