This chapter talks about the different ways to characterize securities.
In most minds, bonds are considered safe, and preferred and common stock are grouped together. These opinions are probably due to the names of the securities.
Graham objects to this classification. He instead proposes a new one:
I - Investment bonds
II - speculative bonds
speculative preferred stock
- low grade senior issues
III -common stock
These items are not to be taken as is; we use the names of each security because of the behavior of each security. Therefore, if you have a common stock, but it acts like a bond, it falls under category I. Category I is safe and stable. Category II is more speculative and fluctuable. Category III is anything that fluctuates greatly and is not safe or stable.
Preferred stock is better grouped with bonds because they behave more like bonds than they do common stock. Preferred bonds are a claim on a fixed amount with a definite dividend; therefore, they fall into the same category as bonds. Readers should keep in mind that in each of the categories of bonds, preferred stock, and common stock, there is a huge number of variations. So, when deciding which category the security belongs in, do not categorize it based on its name, but its behavior.