How to Buy Preferred Stock

Many investors aren’t aware that more than one type of stock is available for purchase on the market. A preferred stock is a combination of both stock and bond and entitles its owner to a number of benefits over an owner of common stock.

Though you can purchase preferred stock similar to how you’d purchase common stock, owners of preferred stock should have a better understanding of investment risk and pay closer attention to stock performance.

Main Takeaways: How to Buy Preferred Stock

• Step 1: Look at the credit ranking of preferred stocks and compare the companies you’re interested in.

• Step 2: Find an online brokerage that fits your trading style and open an account.

• Step 3: Figure out how much you want to invest in the company.

• Step 4: Place your order with your broker.

• Step 5: Keep close tabs on your investments and adjust as your financial goals change.

The Difference Between Preferred Stock vs. Common Stock

Common stock and preferred stock are similar in a number of ways — they both entitle the holder to a percentage ownership of the company, they’re both bought and sold on the open market and the process for acquiring both types of stock is very similar. Despite these similarities, the differences between each type of stock are as follows. 

Common stock

As its name suggests, common stock is usually the type of stock you purchase when trading unless otherwise specified. Owners of common stock make the most money when they sell their holdings.

The value of common stock fluctuates with the movement of the market, so common stockholders aim to buy their stocks at a low price and sell when the value increases. Common stocks are considered more risky than preferred stocks because they are highly volatile and not guaranteed to return dividends.

Preferred stock

Preferred stock carries less risk than common stock because it receives higher and more frequent dividends. Unlike common stockholders, preferred stockholders receive fixed dividends on a predetermined schedule, and these dividends are not subject to the ebb and flow of the general market.

If a company declares bankruptcy, preferred stockholders will receive payouts before common stockholders. However, preferred stock may be “callable,” meaning that the company can purchase the stock back at any time, for any reason.

Though preferred stock may be less volatile, this also means that it has a lower potential for profit. Preferred stock options are usually a better idea for investors closer to retirement or those with a lower risk tolerance. Watch the video below for more detail.

How to Purchase Preferred Stock

Believe that preferred stock is the right choice for you? Follow these steps to add preferred stock to your list of assets.

Step 1: Compare the credit ratings of preferred stock of different companies

Like bonds, preferred stocks carry a credit rating that you can see before you decide to buy. Preferred stocks with a higher credit rating will carry less risk than those with lower ratings. To check the credit ratings of your preferred stock, visit Standard & Poor’s global site, create an account, and search for a company using the “Find a Rating” tab.  

Step 2: Compare online brokerage firms and open an account

Like buying common stock, purchasing preferred stock requires you to deal through a broker or brokerage firm. There are a large number of brokerage firms that now operate online which allow you to open an account with a low minimum balance and trade. Each broker comes along with a unique set of advantages and disadvantages.

Consider a number of factors, including trading support, commissions, fees, ease of platform use, and brand reputation before opening an account. Not sure where to start? Check out Benzinga’s list of the best online brokerage firms  for a crash course in choosing a broker.

Here are some of our favorites: 

Step 3: Decide how many shares you want to purchase

Follow your stock of choice for at least a week before you make sure you’re buying at a low price. A common mistake that beginners make when executing their first trade is to buy too much in an effort to lower the effects of their broker’s commission.

A much better strategy is to be conservative, buy a few shares and see how they do in the coming weeks, and purchase more if they perform well. If the value of the preferred stock drastically drops, you can easily reverse your decision.

Step 4: Place your order with your broker

Once you’ve decided how many shares you’d like to buy, use your brokerage’s trading platform to request a buy. Though the specific mechanisms of how to execute your trade will depend on your platform, most brokerage firms have a specific tab or page dedicated solely to buying and selling stock.

Enter the name of the stock, your order type, and the number of stocks you’d like to buy. Your broker will handle the rest, and you’ll soon see your new stocks in your account.  

Step 5: Monitor your stock’s performance

Preferred stock is a more stable investment than common stock, so you won’t have to check in on its performance daily. However, you should make time to evaluate your stock’s performance at least once a year and recalibrate your portfolio to remove underperforming assets

Final Thoughts

Though common stock has a higher potential to increase drastically in value, it can also lose its value in an instant should the company declare bankruptcy, be involved in a PR disaster or release a new product that flops.

If you’re close to retirement and don’t want to risk your savings in the market, choose preferred stock or purchase bonds. They are less volatile and retain their value better than common stock.  

Ready to start investing in preferred stock? Check out Benzinga’s guide on how to create an investing strategy.