How to Buy Preferred Stock

Preferred stocks are one of the many investment vehicles available to investors. Like common stocks, they represent ownership in a company and you buy proffered stock the same way. However, before you buy preferred stock, you should know how it differs from common stock. Preferred stock is a good choice for many people and is often an integral part of an IRA or other retirement plan.

Difficulty:

Moderate

Instructions

1. Learn what the differences are between preferred stock and common stock. Preferred stock takes priority over common stock when earnings are disbursed as dividends. Usually, dividends on preferred stock are higher, and are paid at regular intervals. The dividends are sometimes guaranteed. If the company has a bad year, and the dividends are not paid, this guarantee means that the payment will be made later, but before any common stock dividends are paid. An important point to consider is that if the company becomes insolvent, preferred stockholders are paid out of any company assets left after creditors are paid before common share stockholders receive any money.

2. Understand the advantages when you buy preferred stock. Because preferred stock normally has higher and more regular dividends, it is less volatile than common stock and carries less risk. With a preferred stock that has a guaranteed dividend, it is often considered a fixed-income investment similar to a bond. At the same time, if a company grows, the stock value can appreciate. For many investors, this fixed-income characteristic makes preferred stock a good choice for long-term retirement investments (for example, as part of an IRA portfolio).

3. Be aware of the disadvantages of preferred stock. While preferred stock carries less risk than common stock, it has more risk than bonds and may not offer a better income from dividends than the interest on bonds. In addition, preferred stock does not fall into the same classification for tax purposes. Unless the income is sheltered, it will be taxed as regular income.

4. Open a brokerage account. You need the same type of account that is used for buying common stock, and you place buy and sell orders the same way. You can open an account through your bank or use a full-service or discount brokerage.

5. Research a company thoroughly before you purchase preferred stock just as you would for a common stock investment. Look for articles in business publications that discuss the company's performance and prospects. Go to its website and study the information it provides for investors and order a copy of the company's annual report.

References

• Investopedia: 20 Investments: Preferred Stock

Resources

• Read this Article in Spanish