Auction Market Preferred Stock (AMPS)

Exploring Auction Market Preferred Stock (AMPS): A Guide

Understanding AMPS

Auction Market Preferred Stock (AMPS) represents a unique type of preferred equity that offers variable dividend yields. Unlike traditional preferred shares, where dividends remain fixed, AMPS dividends are periodically reset through Dutch auctions, typically every one to five weeks.

How AMPS Works

AMPS shares function similarly to fixed-rate preferred shares, with dividends paid out to preferred stockholders before common stock shareholders. However, the mechanism for setting the dividend value in AMPS involves Dutch auctions. This flexibility often leads to more stable prices compared to fixed-rate preferred stocks.

The History of AMPS

AMPS emerged in the 1980s as institutional borrowers sought variable-rate securities in a high-interest rate environment. Although offering higher yields, AMPS provided less liquidity compared to conventional investments like stocks and bonds. The frequent Dutch auctions turned these securities into short-term investment options.

Benefits and Risks

Investors in AMPS enjoy the potential for higher interest rates than other short-term investments, along with the flexibility to participate in frequent auctions. However, during the 2008 financial crisis, the AMPS market faced significant challenges when auctions failed to attract enough bidders, leaving investors with illiquid assets.

Regulatory Response

In the aftermath of the financial crisis, regulatory bodies such as the SEC and FINRA intervened, reaching settlements with major financial institutions to repurchase AMPS from qualified investors, aiming to mitigate the impact of the market collapse.