How to Convert Preferred Shares to Cash
Preferred stock shares are referred to by many investors as "hybrid" securities as they have attributes of stock and bonds for both the issuing company and the investor. In the end, however, preferred stocks do not trade on the stock market, but they do pay a dividend which is based on a coupon (interest) rate. Some brokers don't understand preferred stock and the symbols can be a difficult to understand, but the payoff can be worth it.
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Instructions
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Obtain the most recent prospectus for the preferred stock. Ask your broker or download this from the investor relations site of the issuing company.
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Estimate the selling price of your stock. Determine whether your preferred stock is selling at a premium or discount to the face value. The face (par) value is the intrinsic value of the preferred stock.
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Research current market interest rates. Go to the US Treasury Department for the most recent interest rate curve. If the dividend yield is higher than current interest rates, the preferred stock market value will be at a premium (higher than the face value). If the dividend yield is lower than current interest rates, the preferred stock value will be selling at a discount, as an investor can purchase bonds in the market which pay a higher rate of interest.
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Look for a provision for converting preferred stock shares into common stock in the prospectus. This will allow you to get an exact price for what your preferred stock is worth in the market, rather than a ballpark estimate. Look for terms like "Conversion" or "Conversion Ratio" in the prospectus.
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Walk through a conversion rate example. If preferred stock has a conversion factor of 5 this means that you get five common stocks for every one preferred stock. If the price of the stock is $10, then the price you can expect to sell your preferred stock for is $50 ($10 x 5).
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Sell your preferred stock. Now that you have an idea for what your security is worth, you will be in a better position to discuss options with your broker. Contact the broker that sold you the preferred. Let them know you would like to sell your stock. If the price sounds reasonable based on your research, accept the offer.
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