[overbet]

Hi everyone, I am new to the forum. I am an active trader (too active sometimes) and I have a question that I hope someone knowledgeable on this forum can answer. I have searched and searched for an answer but have yet to find a satisfactory one. I arbitrage the spread between common and preferred stocks, such as: NWS & NWSA, RIO & RIOPR and more recently in the news PBR & PBRA. My question is this, Why is there such a price difference between the common and preferred shares of companies? I understand if there is an obvious difference such as voting rights or dividends, however as an example, I have read the prospectus for RIO and cant find any difference that would constitute that big of a difference in share price. I also read somewhere that because one has options available and the other does not could be the reason, but this doesnt seem right to me either. I am concerned because it is uncomfortable for me to be short the less expensive stock in fear that I may lose the spread. If anbody has any input, Thx in advance.

[Fredledingue]

One explanation could be that prefered are little traded so they don't reflect market moves or common stock fluctuations.
They are often owned by institutional owners who never sell. I nobody sells them their price might be overvalued while the commons are solding off.

Prefered have, by law, more guarantees (partial or total refund) in case of bankrupcy.

[overbet]

Thanks for the response, however all of those stocks I named are liquid. They do at least a million shares per day. You are correct though....I once got caught in a position where the stock only did 25k shares a day. I was short and had to pay way up to get out of it. Since then I make sure to only trade liquid stocks. Thanks again. Any other thoughts?

[Stocktrading101]

My question is this, Why is there such a price difference between the common and preferred shares of companies?

How are you determining the price difference? Are you looking at flat out price or are you weighing total shares, float, etc. into the equation as well?

[overbet]

I am looking at the flat out price. Is there something I am missing? Thanks Jason

[Stocktrading101]

Though I do not have a concrete answer, I do have a pretty decent guess.

The simplest way of putting it would be to think of ETFs. Most ETFs have big spreads and don't accurately track the index they are following. I still to this day can't figure out how some of these ETFs stay correlated with the index they are following.

Knowing the above, can it be any different that BRKA does not trade exactly in sync with BRKB? I would say that it is not a big surprise at all, even though I do not know why.

My guess would have to be that it has to do with the liquidity overall (the float, daily volume, share price, etc.)