How to Buy a Preference Share

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As the name implies, a preference share gives an investor preferential treatment over common stock holders when it comes to dividend payouts. Though usually the right to vote as a stock holder is lost, an owner of a preference share is guaranteed to receive a fixed dividend, at a higher rate than common stock, and at a fixed time.

Ask your friends and associates about the stock brokerage firms they use and get recommendations. Make appointments with several to interview them. Gather information about their policies and procedures, fees, products and the personal investment knowledge of the broker you are interviewing. If you are choosing an online brokerage firm, obtain the same information before you open an account.

Select the stock-brokerage firm, whether it's a local office or online firm, that you feel comfortable with. If you use an online discount brokerage, it may be to your advantage to see if you can interview and select an account manager, or broker, within the brokerage firm to work with exclusively.

Research and educate yourself about the various types of preference stocks offerings. There are several different types of preference stock categories, depending on the needs of the company and the investor. The five main categories are prior preferred stock, preference preferred stock, convertible preferred stock, participating preferred stock and cumulative preferred stock. (See Reference 3 for complete definitions.) Websites are available to assist you, or your local library and stock broker can provide information.

Research the company you want to invest in (see Reference 2 for a list of preferred stocks and research), or ask your stock broker to research company's financial soundness and future. Preference, or preferred, stocks are referred to as a combination of stock and bond investing. Investigate whether the company you want to invest in has the cash to pay its dividends. (See Reference 1 for an in-depth discussion on Preference and Preferred stock buying.)

Purchase shares of preference stock in the company the same way you would to purchase common stock through a stock brokerage firm.

Tips & Warnings

  • Not all stock brokers are knowledgeable concerning the intricacies of preference shares. If you feel that is the case with the broker you have chosen, do not hesitate to seek a new broker.
  • Even though preference shares have priority in payout of dividends over common stock in a company, it does not necessarily mean you will receive your dividend payment no matter what. As an example, if a publicly traded company goes into bankruptcy, no dividends, common or preference, will be distributed to share holders.

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