How to Compute the Price of Preferred Stock

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If you calculate before buying preferred stock, you may find out you are getting a bargain.
If you calculate before buying preferred stock, you may find out you are getting a bargain.

Both preferred stock and common stock offer dividends. However, dividends from preferred stock are fixed and often are larger than those from common stocks. In addition, dividends from common stock fluctuate. Preferred dividends are set and rarely change. The price of preferred stock is calculated by using a par value, dividend payment and a required rate of return. Computing the price of preferred stock helps determine whether you are overpaying or underpaying for the stock.

Instructions

    • 1

      Obtain the par price of the preferred stock. The par price is the original price at which the stock was issued. You can ask your broker for this information, or you can find it in the stock's prospectus located on the company website.

    • 2

      Obtain the preferred dividend. A dividend is a payment the company gives you for each share of preferred stock you own. Again, your stock broker can provide this information for you, or you can find it in the stock's prospectus.

    • 3

      Compute the preferred dividend. Sometimes the prospectus reflects the preferred dividend as a percentage rate of the par value, called the dividend rate. In this case, you must calculate the dividend. The preferred dividend is equal to the dividend rate times the par value. For example, if the prospectus gives a dividend rate of 10 percent and a par value of $100 dollars, the preferred dividend would equal $10 dollars (.10x100=$10.00).

    • 4

      Calculate the required rate of return using an online calculator. This rate is the bare minimum at which investors will invest their money. Visit the Money-zine website. This site and others like it, such as Moneychimp and Investment Analysis Calculator, provide precise calculations needed to determine the required rate of return.

    • 5

      Compute the stock price. Divide the preferred dividend by the required rate of return. The total equals the preferred stock price. This is the highest price you should pay for the stock. If you can buy the stock at a lower price than this, you are getting a bargain. Paying prices higher than this means you are paying a premium.

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