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Did you know that more than 1 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.
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.
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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.
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 stock is considered more risky than preferred stock because they are highly volatile and not guaranteed to return dividends.
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. These dividends are not subject to the ebb and flow of the general market.
If a company declares bankruptcy, preferred stockholders 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 1st 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. 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.
Check Out Preferred Stocks
Common stock has a higher potential to increase drastically in value, but it can also lose its value in an instant. Check out preferred stocks or purchase bonds to hedge your risk.
Near retirement? Simply don’t want to risk your savings? Preferred stocks are less volatile and can retain value to provide more security as you invest.
Ready to start investing in preferred stock? Check out Benzinga’s guide on how to create an investing strategy.
Frequently Asked Questions
What is a preferred dividend?
A preferred dividend is one that’s accrued and paid on a company’s preferred shares. In the event that a company is unable to pay all the dividends, preferred dividends are paid first over dividends that are paid on common shares. Preferred stock pays much higher dividend rates than common stock of the same company — it’s the main benefit to owning preferred shares.
How do preferred stocks trade compared to common stocks?
Preferred stocks trade the same way as common stocks — it usually occurs through a brokerage firm and with the same transaction costs.
Common and preferred stock prices offered by the same company differ. Preferred stocks tend to be more stable because of their regular income stream and common stock is often more volatile.
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