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. Learn more with investment expert Rick Pendergraft's KISS System.]
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