Web Trader MT5 
To purchase preferred stock, you open an account with a broker, look up the ticker symbol of preferred stock, and place a buy order.
In the event that you desire an investment that will pay a fixed dividend as a bond, and, at the same time, will provide you with an ownership interest in a company as a stock, then you may want to consider preferred stock.
Many new investors start with regular stocks without knowing that there is a hybrid asset class made just for steady income.
To learn how to invest in preferred stock, you need to first understand what makes it different from other types of stocks. This type of asset class is a good middle ground between stocks and bonds, with its own set of benefits.
It has the fixed income potential that comes with debt instruments, as well as a priority claim over regular shareholders.
This guide tells you everything you need to know about preferred stock, including how it works in the market and how to buy it for your portfolio. By the end of this article, you will know how this special asset works and how to buy preferred stock with confidence.
Quick Answer
You can buy preferred stock through a brokerage account by looking up a company’s preferred shares using their ticker symbol, looking over the terms and dividend, and then placing a buy order. Preferred stock typically pays fixed dividends and is typically paid out prior to common stock, although they often do not come with voting rights.
What Is Preferred Stock?
Preferred stock is a special form of equity security that pays a fixed dividend and has a higher priority to corporate assets than the shareholders of common stock do.
Preferred stock is just like any other stock in that it is considered to be a partial ownership share in a corporation. These shares are however governed by various regulations which place much emphasis on dependable earnings rather than on short-term capital gains.
It’s a combination of a bond and an equity asset. It is a bond, but as well as an equity.
Key Features Of Preferred Stock
The only thing you have to know about this asset is its features. Its key characteristics are:
- A fixed or predictable dividend yield: Preferred dividends, by contrast, are usually a fixed percentage of the face value of the stock, and regular dividends are varied according to the profits of the company.
- Preference in dividend payment: Preferred shareholders have a priority; companies should first pay them their promised dividends, then pay them any dividends.
- Higher claim on assets (liquidation preference): If a company goes bankrupt and sells off its assets, preferred owners get paid back before regular stock owners.
- No right to vote: Preferred shareholders usually give up their right to vote on things like electing the board of directors in exchange for getting paid first.
How Preferred Stock Fits In A Portfolio
Preferred stock falls strictly between bonds and common stock in terms of money. It has more risk than a company’s debt (bonds) but less risk than its regular equity.
This structure makes it an excellent choice for income-oriented investment strategies. Investors can combine individual preferred stocks with larger exchange-traded funds to have a steady stream of cash.
Preferred stocks are highly sensitive to fluctuations in interest rates since they have a fixed par value and stipulated dividend rate. This works the same way as traditional bonds.
How Is Preferred Stock Different From Common Stock?
The major distinction between the preferred and common shares is that the former pays fixed dividends and is paid first, whereas the latter gives you the right to vote and the possibility to grow at varying rates.
Comparing the preferred stock to the common stock, the investors are actually making a choice between low risk and the possibility of achieving profits on their investment. They both provide you with a stake in a company, but they are both aimed at helping you achieve very different financial objectives.
Dividend Differences
Preferred stock has a fixed rate dividend, thus you are assured of the amount you will get after every quarter. The dividend will be calculated with the stock par value and the contractual terms.
On the other hand, common stock pays out dividends that can change based on how well the company does each quarter. The board can raise, lower, or stop these dividends.
Ownership And Voting Rights
Common stock gives shareholders the right to vote, which lets them have a say in important business decisions. In the case of preferred stock, voting rights are usually not enjoyed by the preferred stockholders, and so the preferred stockholders are silent partners who are more interested in making money than in control of the company.
Liquidation Priority
In case of bankruptcy of a company, the company will be required to pay off its debts in a legal order. To begin with, the creditors and bondholders receive payments. In case of debt payment, the money is first paid to the preferred shareholders and the remaining to the common shareholders.
Risk And Return Profile
Preferred stock tends to be less volatile and is income-oriented, so a share price does not rise and fall in a very drastic fashion. Common stock has a higher likelihood of increasing, yet it represents a significant amount of market volatility.
| Feature | Preferred Stock | Common Stock |
| Dividend Payout | Fixed and predictable | Variable and subject to change |
| Voting Rights | Usually none | Yes (typically one vote per share) |
| Liquidation Priority | High (Paid before common) | Low (Paid last) |
| Price Volatility | Generally low | Moderate to high |
| Primary Investor Goal | Steady income generation | Capital growth and appreciation |
What Are The Main Types Of Preferred Stock?
There are different types of preferred stock, such as cumulative, convertible, and callable. Each type has its own pros and cons for the investor.
There are differences between preferred shares. Companies issue different series of preferred stock with different structural terms to attract different types of investors.
Cumulative Preferred Stock
When a company issues cumulative preferred stock, it has to pay any missed dividend payments to preferred shareholders before it pays anything to common shareholders. A company may have to stop paying dividends for a short time if it is having financial problems. If the shares are cumulative, these unpaid dividends build up over time.
Once the business gets back on its feet and starts paying out dividends again, it is legally required to pay all of the accumulated dividends that have built up to cumulative preferred shareholders first. This feature makes it a great choice for investors who want extra security and are focused on income.
Convertible Preferred Stock
Investors who own convertible preferred stock can trade their preferred shares for a certain number of common shares under certain conditions. This kind of share combines the safety of a fixed dividend with the chance to make money like common equity.
If the company’s stock price goes up, the investor can change their holdings to take advantage of that growth. Investors who want to protect their money but don’t want to miss out on a big bull run might want to learn how to buy convertible preferred stock.
Callable Preferred Stock
When a company issues callable preferred stock, it can buy back the shares at a set price after a certain date. This puts the investor at a specific risk called “call risk.”
If a company sells preferred stock that pays a 6% dividend and interest rates in the market drop to 4%, the company will probably “call” (buy back) the 6% shares and sell new ones at the lower rate. Investors have to put their money back into the market at a lower rate.
How Do You Buy Preferred Stock?
If you want to buy preferred stock, you’ll need a trading account and then utilise the specific preferred ticker symbol to make a trade.
Buying preferred stock online is easy, as these stocks are publicly traded, so anyone who knows how to do so can do it at the click of a button.
Step-By-Step Guide To Buying Preferred Stock
- Open a brokerage account: Select a reputable broker and go through the identity verification process. By opening an account with sites such as STARTRADER, you can access the market information you will need to investigate these kinds of assets.
- Fund your account: Transfer money from your bank account to your trading account to purchase.
- Look up preferred stock using the ticker: Preferred stock tickers are different from common stock tickers. They may have a suffix to specify the series, such as “ABC.PR.A” or “ABC-A”, rather than just “ABC”.
- Review the important factors: Look at the company’s financial stability, dividend rate, and call date.
- Select the type of order: Choose between a market order (buy right away at the current price) and a limit order (buy only at a certain price).
- Type in the number of shares and confirm your trade: Tell us how many shares you want, check the total cost, and submit your order.
Where Preferred Shares Are Traded
Major public stock exchanges list preferred shares, which means that regular brokerage accounts can easily access them. You don’t need a special account at an institution to trade them.
However, it is very important to pay attention to the naming conventions of the ticker. If you buy the wrong series, you will be stuck with a different dividend rate than you wanted.
What Should You Consider Before Buying Preferred Stock?
Before buying preferred stock, investors should look at the dividend yield, call risk, issuer credit quality, and market interest rates.
Preferred stock is usually less volatile than regular equity, but it is not risk-free. Doing the right amount of research makes sure that the income stream stays steady and your main investment is safe.
Dividend Yield
Know exactly how you make money. To find the dividend yield, divide the annual dividend payment by the current price of the stock. Make sure the yield is better than the current bond rates. The favored market has historically provided a large spread above that bar.
The ICE BofA Fixed Diversified Core U.S. Preferred Securities Index has consistently delivered returns above 6%, at levels comparable to high-yield bonds, but at a higher average credit quality.
Call Risk
Always look at the prospectus to see when the call is. This is the risk that the issuer will buy back shares early. If you buy a preferred stock for more than its par value and the company calls it at par value, you will lose money.
Credit Quality Of The Issuer
The issuing company’s financial health has a direct effect on how reliable dividends are. Credit agencies like Moody’s and Standard & Poor’s conduct research that helps investors assess the likelihood that a company will not pay its dividends.
Liquidation
Some preferred shares may not trade as much as their common stock counterparts. If there isn’t much liquidity, it might be harder to sell your shares quickly without taking a lower price.
Interest Rate Sensitivity
The price of preferred stock is negatively correlated with interest rates. When interest rates increase, the fixed dividend of existing preferred shares becomes less attractive, and the price of the preferred shares decreases.
Tax Considerations
Taxes on dividends vary from country to country. Many dividends in the US are treated as qualified dividend income (QDI) and are taxed at no more than 20% (compared to 37% for non-qualified income).
In some places, preferred dividends are taxed like regular income, but in others, they may be able to get lower capital gains tax rates.
Understanding how stock markets work in relation to tax treatment helps explain why income-focused investors sometimes prefer preferred stock over bonds with nominally similar yields.
FAQs
Yes, preferred stock can be a good investment for beginners as long as they know the risks and are focused on making money. It is generally good for investors who want less volatility than common stocks and are focused on income, but they need to know the basics of interest rate and call risks.
Yes, preferred stocks usually pay dividends on a set schedule that is either fixed or predictable. At the time the shares are issued, these payments are set in stone and must be made before any common stock dividends are paid out.
Yes, you can buy preferred stock through regular brokerage accounts. You can look for and buy preferred ticker symbols just like regular shares, as long as your broker lets you access the major stock exchanges.
In bankruptcy, preferred shareholders get paid before common shareholders, but after bondholders and other creditors. You can lose the entire investment if liabilities outweigh the company’s assets, although they have a seniority on common equity in the event of a bankruptcy.
Final Thoughts
Preferred stock is a cross between bonds and stocks. It has regular dividends, and you get priority for distribution, but no voting rights. Look up the distinctive ticker for the preferred stock you wish to purchase in your brokerage account and make a trade.
Hybrid securities can boost portfolio dividend income, but be mindful of interest rate risk and calls. Make sure you read the prospectus before investing to determine if the shares are cumulative or convertible.
Understanding these features will help you make the transition from common shares to preferred shares.
Tags
Open Live Account
Please enter a valid country
No results found
No results found
Please enter a valid email
Please enter a valid verification code
1. 8-16 characters + numbers (0-9) 2. blend of letters (A-Z, a-z) 3. special characters (e.g, !a#S%^&)
Please enter the correct format
Please tick the checkbox to proceed
Please tick the checkbox to proceed
Important Notice
STARTRADER does not accept any applications from Australian residents.
To comply with regulatory requirements, clicking the button will redirect you to the STARTRADER website operated by STARTRADER PRIME GLOBAL PTY LTD (ABN 65 156 005 668), an authorized Australian Financial Services Licence holder (AFSL no. 421210) regulated by the Australian Securities and Investments Commission.
CONTINUEImportant Notice for Residents of the United Arab Emirates
In alignment with local regulatory requirements, individuals residing in the United Arab Emirates are requested to proceed via our dedicated regional platform at startrader.ae, which is operated by STARTRADER Global Financial Consultation & Financial Analysis L.L.C.. This entity is licensed by the UAE Capital Market Authority (CMA) under License No. 20200000241, and is authorised to introduce financial services and promote financial products in the UAE.
Please click the "Continue" button below to be redirected.
CONTINUEError! Please try again.
