The Investment Pecking Order Comes Into Play
I’ve cautioned you before about settling for the common shares of troubled companies. Why? Because if the company goes under, bondholders and preferred shareholders get paid before the common shareholders get a penny.
As I’ve said, this pecking order isn’t a concern most of the time. But when major companies like Fannie Mae (FNM) and Freddie Mac (FRE) are facing disaster, you should sit up and take notice. While it didn’t take a genius to see that FNM and FRE were on the brink of being taken over by the Feds, I hope you heeded my warning.
As it turns out, the overall market rallied sharply after the Feds announced that they would take control of the two mortgage giants on September 8. The announcement created a sense of confidence, or at least it removed some doubt about the economy. But FNM and FRE both dropped over 85 percent as a result of the news. Their preferred shares took a similar hit.
FNM and FRE bondholders look like the winners in this case, while the stockholders (common and preferred) will be the big losers.
To keep your money safe, always do your homework before you invest.
[Ed. Note: Making smart investment choices is the best way to protect your money. Companies with strong fundamentals are best equipped to withstand major market changes. But don’t be afraid of small fluctuations in the market. These movements can offer you the perfect opportunity to profit.]Rick Pendergraft
Inspired by his high school economics teacher, Rick Pendergraft fell in love with the markets at an early age. He entered his first investing competition at 17, and opened his first brokerage account before he finished college. At the age of 23, on the third options trade he had ever placed, Rick turned $1,800 into $22,000 in less than a week, when the company he bought became the target of a takeover. He admits it was a stroke of luck, but it was a memorable education as to the leverage that options can provide. After a ten year career in banking, Rick decided to pursue trading full-time. To get his foot in the door, he started out in the sales department at Schaeffer's Investment Research. It was not long before his talent was recognized and he was invited to apprentice under Bernie Schaeffer, one of the top options traders in the world. Rick thrived in his new position and twice received the award for "Top Trader."Rick has developed a loyal following of readers who are grateful for his timely warnings and profitable advice. He is widely recognized as a market expert and has been frequently quoted by Reuters, BusinessWeek, Forbes, USA Today, the New York Times, and the Washington Post. Rick's primary focus is on identifying short and intermediate term rising and falling trends in the major market sectors. His analysis is based on technical factors along with indicators of market sentimentRick lives near Delray Beach, FL with his wife and three children.