How to Buy Preferred Stock

Did you know that more than one type of stock is available for purchase on the market? Preferred stock is a combination of stock and bond and entitles its owner to a number of benefits over an owner of common stock.

Though you can purchase preferred stock similar to how you’d purchase common stock, owners of preferred stock should have a better understanding of investment risk and pay closer attention to stock performance.

What Are Preferred Stocks?

Preferred stock is a type of stock that gives investors a fixed dividend and priority over common stockholders when it comes to the payment of dividends or liquidation of assets in the event the company goes bankrupt. Preferred stock usually has a fixed dividend rate, meaning that it pays out a predetermined amount each quarter or year. The rate is often higher than what common stocks offer, making them an attractive option for investors looking for steady income.

5 Steps for Purchasing Preferred Stocks

Believe that preferred stock is the right choice for you? Follow these steps to add preferred stock to your list of assets.

Step 1. Compare the Credit Ratings of Preferred Stock of Different Companies

Like bonds, preferred stocks carry a credit rating that you can see before you decide to buy. Preferred stocks with a higher credit rating will carry less risk than those with lower ratings. To check the credit ratings of your preferred stock, visit Standard & Poor’s global site, create an account and search for a company using the “Find a Rating” tab.

Step 2. Compare Online Brokerage Firms and Open an Account

Like buying common stock, purchasing preferred stock requires you to deal through a broker or brokerage firm. Many brokerage firms operate online, allowing you to open an account with a low minimum balance and trade. Brokers have unique advantages and disadvantages.

Consider a number of factors, including trading support, commissions, fees, ease of platform use and brand reputation before opening an account. Not sure where to start? Check out Benzinga’s list of the best online brokerage firms for a crash course in choosing a broker.

Step 3. Decide How Many Shares You Want to Purchase

Follow your stock of choice for at least a week before you make sure you’re buying at a low price. A common mistake that beginners make when executing their first trade is to buy too much in an effort to lower the effects of their broker’s commission.

A better strategy is to be conservative, buy a few shares and see how they do in the coming weeks. Consider purchasing more if they perform well. If the value of the preferred stock drastically drops, you can change your mind about buying more.

Step 4. Place Your Order With Your Broker

Once you’ve decided how many shares you’d like to buy, use your brokerage’s trading platform to request a buy. Though the specific mechanisms of how to execute your trade will depend on your platform, most brokerage firms have a specific tab or page dedicated solely to buying and selling stock.

Enter the name of the stock, your order type and the number of stocks you’d like to buy. Your broker will handle the rest, and you’ll soon see your new stocks in your account.

Step 5. Monitor Your Stock’s Performance

Preferred stock is a more stable investment than common stock. However, you should make time to evaluate your stock’s performance at least once a year and recalibrate your portfolio to remove underperforming assets.

Why Should You Buy Preferred Stock?

Investing in preferred stock can be a good option. It offers benefits similar to stocks and bonds. Preferred stock typically provides higher dividend yields than common stock, giving a more stable income. In case of liquidation, preferred stockholders are served before common shareholders, offering more security. Some preferred stocks can be converted into common shares, adding potential value in rising markets. This type of investment is attractive for those seeking safer equity investments with predictable returns and the possibility of capital gain. Understanding preferred stock's benefits can help you decide if it's right for your portfolio.

Stable Income

Preferred stocks usually offer fixed dividends, which can create a consistent income source that is often greater than the dividends from common stocks. This aspect may attract investors who prioritize income.

Priority in Payments

If a company is liquidated, preferred shareholders receive their payments before common shareholders. This lower risk of loss may make preferred stocks a more secure investment during times of financial trouble.

Potential for Capital Appreciation

Preferred stocks tend to be more stable than common stocks, but they still have the potential to increase in value. If interest rates go down, the value of current preferred shares could go up, leading to possible capital gains.

Hybrid Investment

Preferred stocks have characteristics of both equity and fixed-income securities, providing a balance between risk and reward. They may be a good option for investors seeking a combination of stability and growth.

Convertible Options

Some preferred stocks have conversion features, which let investors change their shares into common stock under specific conditions. This may offer potential gains if the company does well.

Considerations Before Buying Preferred Stock

Investing in preferred stock can be a smart choice for those wanting both equity and fixed income. But it's important to consider a few key factors before investing. Preferred stocks usually offer fixed dividends and rank higher than common stocks during asset liquidation. However, they come with some risks and differences compared to regular stocks. Investors should look at dividend stability, interest rate sensitivity, callability, and the financial health of the issuing company. It's also important to know that preferred stocks do not have voting rights. Understanding how they fit into an overall investment strategy is essential. By evaluating these factors, investors can choose wisely and align their investments with their financial goals.

Dividend Reliability

Evaluate the company's capacity to regularly pay dividends. Unlike bonds, preferred dividends can be paused without leading to bankruptcy. Analyze the company's financial status, cash flow, and past dividend payments to assess its dependability.

Interest Rate Sensitivity

Preferred stocks can be affected by changes in interest rates. If interest rates go up, the value of preferred stocks might go down because newer issues with higher rates may look more appealing. It's important to keep in mind the current interest rate situation and what may happen in the future.

Credit Quality

Assess the credit rating of the issuer. Agencies such as Moody’s and S&P typically rate preferred stocks. A higher credit rating suggests a lower risk of default, while issuers with lower ratings may have a higher associated risk.

Liquidity

Preferred stocks might trade less frequently than common stocks, which can create difficulties when trying to buy or sell shares at good prices. Make sure the preferred stock you are looking at has sufficient liquidity to meet your investment requirements.

Conversion Features

Certain preferred stocks come with options to convert into common shares. It's important to know the terms and conditions of these features, as they can impact your investment strategy, particularly if the company's stock does well.

Best Online Brokerage Firms

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The Difference Between Preferred Stock vs. Common Stock

Common stock and preferred stock are similar in a number of ways — they both entitle the holder to a percentage ownership of the company, they’re both bought and sold on the open market and the process for acquiring both types of stock is similar. Despite these similarities, the differences between each type of stock are as follows.

Common Stock

As its name suggests, common stock is usually the type of stock you purchase when trading unless otherwise specified. Owners of common stock make the most money when they sell their holdings.

The value of common stock fluctuates with the movement of the market, so common stockholders aim to buy their stocks at a low price and sell when the value increases. Common stock is considered more risky than preferred stock because it is volatile and not guaranteed to return dividend payments.

Preferred Stock

Preferred stock carries less risk than common stock because it receives higher and more frequent dividend payments. Unlike common stockholders, preferred stockholders receive fixed stock dividends on a predetermined schedule. These dividends are not subject to the ebb and flow of the general market.

If a company declares bankruptcy, preferred stockholders receive payouts before common stockholders. However, preferred stock may be callable, meaning that the company can purchase the stock back at any time, for any reason.

Though preferred stock may be less volatile, it means that it has a lower potential for profit. Preferred stock options are usually a better idea for investors closer to retirement or those with a lower risk tolerance. Watch the video below for more detail.

Stable Investment Option

Buying preferred stock offers a stable investment with stock and bond benefits. Investors should compare credit ratings, select a reputable brokerage firm and decide on the number of shares to purchase. They should then place an order and monitor the stock's performance for consistent dividend yields and lower volatility. Preferred stock is a good option for stability and reliable returns.

Check Out Preferred Stocks

Common stock has a higher potential to increase drastically in value, but it can also lose its value in an instant. Check out preferred stocks or purchase bonds to hedge your risk.

Near retirement? Don't want to risk your savings? Preferred stocks are less volatile and can retain value to provide more security as you invest.

Ready to start investing in preferred stock? Check out Benzinga's guide on how to create an investing strategy.

Frequently Asked Questions