Best Way - Investing in Preferred Stock

Investing in Preferred Stock

As its name suggests, a preferred stock is a type of stock ownership that offers priority over common stock in terms of dividend distribution and payment, in case of liquidation of the company. A company usually lists 10 percent of its total stock as preferred stocks. Investing in preferred stock offers both pros and cons. Dividends, for example, are usually higher for preferred stock, making them desirable to retirees and others who require investments to provide a fixed income. On the other hand, preferred stocks rarely undergo the exuberant upswings (and downswings) or their common stock counterparts.

Finding Preferred Stocks

The first step to investing in preferred stocks is to locate high-performing preferred stocks. Preferred stocks can be researched just like common stocks. Typically, preferred stock listings are found in the financial papers and newspapers that specialize in the financial industry, such as the Wall Street Journal and the Investor's Business Daily. Unfortunately, preferred stock ticker symbols are not standardized and you must research each market (such as NASDAQ and NYSE). Generally, preferred stocks are marked with a "P"; a letter for its class (A, for example) and voting rights (R).

Researching Company Performance

If you have found a company that includes preferred stocks, you must research the underlying fundamentals of the company before you invest. Many investors believe that because preferred stockholders are guaranteed payment that research is not necessary. In investing, nothing is guaranteed. However, investing in high-performing preferred stocks can mean higher income and a level of increased safety. To determine this performance, a good place to start is a study of the company's dividend history. Companies with a history of paying dividends and increasing dividends are preferable. You can also check the price of the preferred stock and the company's common stock to determine the strength of the company.

Be Alert to Potential Danger Signs

Despite the relative security of investing in preferred stocks, these stocks are not risk-free investments. While preferred investors are given priority of payment in case of a liquidation, bond holders have priority before preferred stock owners. Likewise, when dividend payments are suspended, preferred stocks can be affected. It's critical, therefore, to check for danger signs before investing. If the company has suspended dividends in the past, this is a danger sign. (You can use financial websites to review dividend history.) If the industry that the company competes in is suffering major setbacks, this, too, could signal trouble for the preferred stock and its dividend.

Buying And Selling Preferred Shares

Your next step toward purchasing preferred shares is to find a broker to execute your order to buy the equities. The fees and performance of brokers vary. Discount brokers can be found through an online search. Most reputable brokers include fee schedules and commission rates. But price is only one facet of picking a broker. You should choose a broker that offers quality service. A quick online search should reveal praise and criticism of brokers.

Continue To Monitor

The job of the investor in preferred stocks is never done at the purchase of the equity. You must continually monitor the performance of the company and the stock for signs of trouble and for signs of improvement (in case you want to add to your position). You should also be on watch for other preferred stock-buying opportunities; there may be more lucrative stocks out there.