What type of risk is associated with preferred shares?

The risk associated with preferred shares that is primarily considered is redemption risk. Redemption risk can arise when a company decides to redeem its preferred shares before the expected time, usually at a predetermined price. This can be unfavorable for investors if the shares are called when the market conditions are not advantageous, or if the investor was relying on the dividends for a certain period.

Preferred shares are unique because they typically provide fixed dividends, and if they are redeemed early, the investor may lose out on future income, especially if they cannot reinvest the capital at a similar rate of return. This risk is particularly relevant in the context of interest rates; if rates decrease, companies may opt to call their preferred shares to issue new ones at lower rates, impacting the expected cash flow for preferred shareholders.

Understanding redemption risk allows investors to evaluate their exposure to potential losses in income. Other risks mentioned, such as market risk, credit risk, and interest rate risk, while relevant to investment in stocks or bonds, do not specifically define the unique considerations surrounding preferred shares as much as redemption risk does.