How to Trade Preferred Stocks

How to Trade Preferred Stocks
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When a corporation is publicly traded, they have two types of stock: common stock and preferred stock. Preferred stock has a higher claim on any company assets than common stock. Also, preferred stock usually has a set dividend paid to the owner, while common stock may have a smaller or different dividend. Also, the price of a company's preferred stock will be different than the common stock trading on the open market. Trading preferred stock is similar to buying and selling common stock.

Contact your broker to obtain the symbol for the preferred stock. Many brokers will trade preferred stock for you. Many brokerages use different variations of the letter "p" to signify how to look up preferred stock. For instance, a brokerage may have a preferred ticker symbol where the p is located after the third letter of a company. So Company XYZ, suddenly becomes XYpZ when using that brokerage. Call the brokerage or use their online help desk.

Enter the number of shares you would like to buy or sell. From this point, the purchase or sale of preferred shares is just like buying common stock.

Decide if you would like to add stipulations to your order. For instance, a market order means you will buy or sell at market price. A limit order means you will only buy or sell at a limit price that you set. You can also choose if you want a partial fill order, where if only some of the shares are available, your order will only be partially filled.

Confirm the order and pay the associated commission. The commissions associated with preferred stock are similar to those with common stock. Once your order finds a buyer or seller in the market, the order will be executed and the shares traded into or out of your account.

Tips

  • Preferred stocks are often seen as less risky investments because of the dividend that is paid for owning the shares. However, the upside potential to preferred stocks is generally less because the fluctuations in price are less pronounced.

    Some people think of owning a preferred stock as an annuity because of the significant level of dividend payments they tend to pay versus their common stock counterparts.

Warnings

  • Owners of preferred stock do not have voting rights, whereas owners of common stock for a company do have voting rights.

    Preferred stock owners sit behind bond holders in the chain of assets. This means that in the case of bankruptcy, the bond holders will get a piece of the assets before the preferred stock holders. However, they will be ahead of the common stock holders, who are last in the financial chain.