How to Buy Preferred Shares of Stock

Investors can discover new profits by trading preferred stock. Common stock owners might see their dividend payments reduced and, in some cases, indefinitely suspended. Corporate bankruptcies can leave common stockholders stuck with worthless stock, while preferred stockholders get paid at least a portion of their dividends. Preferred stock has advantages and disadvantages that investors should keep in mind before deciding to invest.

Step 1

Determine if investing in preferred stock meets your investment goals. Some types of preferred stock have dividend payments that are guaranteed by the company, which makes it more like a fixed income investment than a stock. If you are looking for a low-volatility investment with regular fixed dividend payments, preferred stock might have a place in your portfolio.

Step 2

Review the dividend payment rights as outlined in the prospectus to see if the dividends are guaranteed. Preferred stock dividend payments take precedence over common stock, and the dividend is normally higher. Should the company become insolvent, the preferred stock holders receive their payment after the creditors but before the common stockholders.

Step 3

Consider the disadvantages that accompany preferred stock shares. Although they offer fixed income payments like bonds, preferred stock does not enjoy the same preferential tax treatment. Unless it is sheltered, preferred stock dividends are taxed as regular income. Preferred stockholders normally do not have voting rights.

Step 4

Go to your online trading account or open an account if you have not already done so. Use the brokerage’s stock screener to locate and compare different companies’ preferred stock offerings. Conduct your due diligence and examine the financial statements and prospectus. Check the past four quarters to see if the company met, exceeded or missed their earnings. Ensure the company is financially able to meet their preferred stock dividend obligations before you invest.

Step 5

Initiate the trade by typing in the preferred stock symbol, then click on “buy” in the action box and enter the number of shares. Click on the trade button to complete the purchase. Wait for broker confirmation that the trade was filled before closing out the Web page.

Tip

  • Preferred stock symbols are different from common stock symbols, so be sure to enter the correct symbol when placing your trade.

Warning

  • Finding information about a preferred stock can be difficult. Go to the company website or contact your broker to get the information you need to make an informed decision.

Photo Credits

  • Comstock/Comstock/Getty Images

About the Author

Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.

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