A Step-by-Step Guide to Buying Preferred Stock

Preferred stock is a type of investment that offers a higher claim on assets and earnings than common stock, but typically doesn't come with voting rights.

You can buy preferred stock through a brokerage account, and most brokerages allow you to purchase it online.

To get started, you'll need to decide on a brokerage platform, such as Fidelity or Charles Schwab, that offers preferred stock trading.

The minimum investment requirement for buying preferred stock can vary depending on the brokerage and the specific stock you're interested in.

Preferred stock is a type of investment that offers a unique combination of features from both stocks and bonds. It provides stable income like bonds, while giving shareholders ownership stakes in the company, typically without voting rights.

Preferred stock is often seen as a hybrid investment, offering a middle ground between the safety of bonds and the growth potential of stocks. This flexibility allows companies to tailor their preferred stock offerings to meet the needs of both the company and potential investors.

The key characteristics of preferred stock include a fixed dividend payment, a higher claim on assets than common stock, and a par value or face value that determines the redemption price. The price at which a business will finally redeem preferred shares is fixed, and investors are only willing to pay up to this redemption value.

Preferred stocks may be cumulative or non-cumulative, with cumulative preferreds requiring the company to eventually make up any missed dividend payments. Non-cumulative preferreds, on the other hand, do not require the company to make up missed payments.

Here are some key terms to know about preferred stock:

Preferred stock often has no maturity date, but it can be redeemed or called by the issuer after a certain date. The call date will depend on the issuing company, but most companies set it five years out from the date of issuance.

In bankruptcy, preferred stock ranks higher than common stock but lower than bonds. Once the interest on bonds is paid, holders of preferred stock are paid, and only then are holders of common stock entitled to anything.

Preferred stock offers several advantages that make it an attractive investment option. One of the main benefits is its security, which is considered lower-risk compared to common stock.

Preferred stockholders are the first to receive dividends, making it a great source of income. This is especially true for businesses that pay out monthly dividends.

Transparency is another advantage of preferred stock. When you buy preferred shares, you know the liquidation value upfront, so you're aware of the worst-case scenario if the business encounters an issue.

Including preferred stocks in your portfolio can reduce overall risk by providing a balance between income and growth potential.

Preferred stock is taxed at a lower rate than interest income from bonds in certain jurisdictions, making it an efficient income-generating investment, particularly for those in higher tax brackets.

Here are some key benefits of preferred stock:

Preferred stock is a good option for investors who want higher yields than bonds and the potential for more dividends compared to common shares.

Preferred stock is a type of investment that combines elements of bonds and common stocks. It represents an equity interest in a company, but pays regular interest or dividends based on its face value.

Preferred stocks often feature higher yields than common dividend stocks or bonds from the same company. Their dividend payments also take priority over those attached to the company's common stock dividends.

Missing a preferred dividend payment is not considered a default event, but it can have consequences. If the preferred stock is cumulative, unpaid dividends accumulate in an account and must be paid to preferred shareholders before common stock dividends can be paid.

Preferred stocks offer a unique combination of stability and predictability, making them an attractive option for investors.

Their fixed-income nature and priority in dividend payments mean they tend to be less volatile than common stocks.

During periods of market volatility, preferred stocks can provide a reassuring income stream and help preserve capital.

However, it's essential to remember that all equity investments carry inherent risks and volatility.

The value of preferred stocks is closely tied to interest rates and dividend payments, making them less susceptible to market fluctuations.

This stability can be especially beneficial for investors who prioritize predictability over potential for high returns.

Preferred stock is a unique investment that combines features of both bonds and common stocks.

It pays regular interest or dividends based on its face value, which can be monthly, quarterly, or semi-annually.

One of the benefits of preferred stock is that it usually offers higher yields than common dividend stocks or bonds from the same company.

Preferred stockholders have priority over common stockholders when it comes to dividend payments.

If a company misses a preferred dividend payment, it's not considered a default event - but it does depend on the type of preferred stock.

Cumulative preferred stock issues keep track of unpaid dividends, which accumulate in an account and must be paid before common stockholders receive dividends.

Non-cumulative preferred stockholders, on the other hand, don't get a second chance - they're left with the loss.

Preferred stocks are more sensitive to interest rate changes than common stocks. This is because their fixed dividend payments become less attractive compared to new issues with higher yields when interest rates rise.

The value of preferred stocks tends to decrease in a rising rate environment. This can lead to price volatility that some investors might find concerning.

Callable preferred stock is a type of preferred stock that can be redeemed by the issuing company after a certain date. This feature is less common with common stocks.

The callability feature of callable preferred stocks introduces the risk that the shares could be redeemed earlier than expected. This can limit future gains.

Companies might opt to call their preferred shares if interest rates drop, allowing them to issue new shares at a lower dividend rate. This is a common strategy for companies looking to save on interest payments.

Preferred stocks come in various types, each with its own unique features and benefits. There are fixed-rate preferred stocks that offer a fixed dividend rate, while others have a floating rate tied to a benchmark.

Some preferred stocks have a call feature, allowing the issuer to redeem the stock at a predetermined price, while others have a put feature, giving the investor the right to sell the stock back to the issuer.

Perpetual preferred stocks have no maturity date, offering a steady income stream for investors.

There are various types of preferred stocks, each offering different features and benefits that can cater to different investment strategies and risk preferences.

Convertible preferred stock offers the option to convert the shares into a predetermined number of common shares, allowing investors to benefit from the potential upside of the company's common stock while still enjoying the fixed-income benefits of preferred shares.

Participating preferred stock gives shareholders the right to receive additional dividends beyond the fixed rate if the company meets certain financial goals, such as achieving a specified level of profits.

Some preferred stocks come with a conversion feature, allowing holders to convert their shares into a predetermined number of common shares, providing potential upside if the company's common stock performs well.

Convertible preferred stock allows the shareholder to convert preferred stock to common stock at a preset ratio and by some predetermined date, making it a worthwhile option when the underlying asset increases in value.

The conversion price per common share is determined by the conversion ratio and the price at which the preferred stock is issued, as seen in the example of Goldman Sachs' convertible preferred stock with a conversion ratio of 10 and a conversion price per common share of $100.

Conversions are most worthwhile when the underlying asset increases in value, allowing the investor to convert preferred stock to common stock and realize the appreciation, but it's essential to consider factors like dividend income and further appreciation potential before making a decision.

Non-cumulative preferred stock is a type of preferred stock that doesn't require the company to make up for missed dividend payments. These dividends are lost forever for the investor if the company decides not to pay them.

This type of stock is riskier, but can offer higher potential rewards if the issuing company is financially stable and consistently pays dividends. It's like taking a chance on a new restaurant - if it succeeds, you might get a great return, but if it fails, you're out of luck.

Non-cumulative preferreds are typical for bank stocks, which often have variable dividend payments.

Here are some key differences between cumulative and non-cumulative preferred stocks:

Callable preferred stocks are a type that can be repurchased by the issuing company at a set price after a certain date.

This feature is less common with common stocks, but it's a key characteristic of callable preferred stocks. The callability feature introduces the risk that the shares could be redeemed earlier than expected, potentially limiting future gains.

Callable preferred stocks offer higher initial yields to compensate for the call risk. This is a trade-off that investors need to consider.

Companies might opt to call their preferred shares if interest rates drop, allowing them to issue new shares at a lower dividend rate. This can be a strategic move for the company.

Adjustable-rate preferred stock can offer some protection against interest rate fluctuations, making it appealing during periods of rising interest rates.

The dividend rates of ARPS periodically adjust based on a predetermined benchmark, such as the US Treasury bill rate or the LIBOR.

Preferred stocks offer a unique feature that sets them apart from common stocks: fixed dividend payments. These payments are typically made before any dividends are issued to common stockholders.

Preferred shareholders have a higher claim on dividends than common shareholders, which means they're more likely to continue receiving their dividends even if the company reduces or suspends them for common shareholders.

Dividend payments on preferred stocks are not guaranteed, and companies can suspend them during financial difficulties. This is especially true for non-cumulative preferred stocks, which don't require the company to make up for missed payments.

However, some preferred stocks are cumulative, meaning that if a company suspends its dividend payments, the dividends accumulate and must be paid out to shareholders before any dividends can be distributed to common shareholders. This provides an extra layer of security for income-focused investors.

Here's a key distinction to keep in mind: cumulative preferred stocks require the company to make up for missed dividend payments, while non-cumulative preferred stocks do not. Non-cumulative dividends can be missed without penalty, but cumulative dividends must be paid out later.

So you're thinking of buying preferred stock, but you're not sure how it compares to common stock. Here's the lowdown: preferred stock is similar to common stock only in name, and it functions more like debt.

Preferred stock is considered equity for legal purposes, but it's often used to obtain capital rather than attract long-term investors. In fact, you should offer preferred stock if you're more focused on getting capital, rather than looking for a long-term strategic investment partner.

Here are some key differences between preferred and common stock:

One important thing to note is that preferred stock rarely comes with voting rights, whereas common stock owners usually have a say in the company's decision-making process. It's essential to check the terms of the preferred stock you're considering, as it may be called in at "par" regardless of what you paid for it.

Preferred stocks can reduce overall risk in a diversified investment portfolio by behaving differently from common stocks and bonds.

They offer both income and some growth potential, making them a versatile tool in risk management.

Preferred stocks are usually less risky than common dividend stocks, but carry higher yields and lack the opportunity for price appreciation as the issuing company grows.

They also go without voting rights.

The big selling point is that preferred stocks can offer steady income with higher yields.

Here are the key characteristics of preferred stocks to consider:

As with every investment opportunity, you must do your own careful due diligence first.