Many investors are surprised at the different ways they can purchase stock beyond a call to a stockbroker. Income-oriented investors select convertible preferred shares not only for their high dividend yields, but also because these stocks can participate in the growth of the company through their link to the firm’s common stock. You can exchange convertible preferred shares for a stated number of common shares, so the preferred stock gains value as the common stock price rises.
The most straightforward way to buy convertible preferred shares is through a brokerage account. Most brokers offer online accounts that allow you to buy and sell stock at your convenience. Discount brokers offer low fees, usually well under $10 to trade 1,000 shares of stock. If you set up a margin account, you need pay for only half of your purchase upfront, and you borrow the rest from your broker. He will charge you a nominal fee for the margin loan, and you will have to keep the shares or the equivalent amount of cash in the account as collateral. There is no difference in purchasing convertible preferred shares as compared to other kinds of shares.
Sell a Put
A put is a stock option that allows the buyer to sell 100 shares of a stock at a fixed price -- the strike price -- on or before the option expiration date. As the seller of a put, you collect the cost of the option, called the premium. You are obligated to buy the 100 shares if the stock price falls below the strike price. If you want to own the shares anyway, then this method ensures that you receive cash upfront and that your purchase price will be the stated strike price. Put options are available for many convertible preferred issues.
Buy a Warrant
A warrant is a long-term option to purchase shares. The company that issues the stock also issues the warrants, either as stand-alone securities or attached to the company's shares. Purchasers can detach the attached warrants and sell them on the stock market. A warrant is much cheaper than the underlying stock, so a warrant makes sense if you want to conserve your cash until the common stock rises to a point that conversion of the preferred shares becomes profitable. You then exercise your warrant at its strike price to collect your preferred shares, which you can sell or convert into common stock.
Dividend Reinvestment Programs
A dividend reinvestment program allows investors to purchase shares directly from a company without going through a broker. The share price you pay is an average based on prices over a stated period. The transaction usually carries no commission charges, though it might take a couple of weeks to complete. The advantage of a DRIP is that you can have the preferred stock dividends automatically reinvested in additional shares of stock, even in fractional amounts. This compounds your dividend earnings while eliminating fees.
- Preferred Stock Investing; Doug K. Le Du
- Preferred Stocks: The Art of Profitable Income Investing; Ken Winans, John Maybury
- Investing In Preferred Stock: An Introduction For Modern Income Investors; Paul Josephs
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