What is Callable Preferred Stock?

Callable preferred stock is preferred shares in a business that can be bought back by the issuer at a certain price. The call price and other conditions are included in the indenture associated with the stock.

Advantages of Callable Preferred Stock

A key advantage of callable preferred stock is that its call feature allows the issuer to recall shares if the market interest rate declines, and replace it with lower-cost preferred stock or bonds. The result is an overall lower cost of capital for the issuer. The call feature also allows the issuer to buy back preferred stock simply because it wants to overhaul its capital structure - such as by shifting to a more debt-heavy financing structure, or by shifting to more common stock.

Disadvantages of Callable Preferred Stock

Callable preferred stock is a disadvantage for the investor, which may be forced to return a high-payout investment. Consequently, the existence of a call feature tends to put a cap on the market price of these shares.