How Can I Buy Convertible Preferred Shares of Stock?

Once you convert a preferred stock to a common stock, there is no going back.

A preferred stock has several features, including a market price and a dividend rate based on its par or face value. A convertible preferred stock has an additional feature: It can be converted to a predetermined number of the company's common stock by a specified date. Unlike common stocks, however, it is not quite as simple to buy preferred stocks, as there can be different types per company and because it can be difficult to get the relevant financial information.

Things You'll Need

• Brokerage account

Instructions

1. Open a brokerage account if you do not already have one. Most commercial banks offer both full-service and discount brokerage services.

2. Review the financial information of the convertible preferred stock. The information for the underlying stock --- for example, United Rentals (ticker URI on the New York Stock Exchange) for the United Rentals convertible preferred stock --- can be readily found on the company's investor relations Web page. However, you would need additional pieces of information for a convertible preferred. This includes the yield (the annual dividend divided by the market price) and the nature of conversion (some conversions are mandatory, where the preferred shares automatically convert to common shares on a specified date, while others are at the investor's discretion). Sources for this information include the company's regulatory filings, which are usually posted on the investor relations Web page) or an investment adviser.

3. Get the price history of the convertible preferred stock. This may not be a simple process, because some of these stocks are listed on the over-the-counter Pink Sheets market, which is a speculative market with no financial standards or reporting requirements (see Resources). Also, price quotes for some convertible preferred stocks may not be available online, which means you may not be able to trade these stocks online. If that is the case, call the brokerage, speak to one of the traders to get the market price information and then place your order.

4. Place a limit order when you are ready to trade. A limit order is filled at a specified price, while a market order is filled at the current market price. Convertible preferred stocks often trade in low volumes. For example, the Google Finance chart for the United Rentals convertible preferred stock (ticker symbol URIRP on the Pink Sheets) shows limited trading activity. A market order for a thinly traded convertible preferred stock may be filled at the seller's asking price, which may be higher than what you are willing to pay.

5. Keep track of the convertible preferred stock's price, the fundamentals of the company and the cutoff date for converting to common stock. Brokerages usually manage the conversion on your behalf, but call your broker if you decide to convert early.

Tips & Warnings

• A convertible bond is different from a convertible preferred stock, although both can be converted to common shares. A bond is a liability, while a preferred stock is part of a company's shareholders' equity.

References

• Forbes: How to Buy a Preferred
• QFinance: Convertible Preferred Stock
• Value Line: Convertible Preferred Stocks With the Widest Yield Advantages Over Their Underlying Common Stock
• Google Finance: United Rentals

Resources

• The Wall Street Journal: Preferred Stocks: Closing Table
• OTC Markets: Pink Sheets Marketplace