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.
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 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, visitStandard & 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.
This publicly listed discount broker, which is in existence for over four decades, is service-intensive, offering intuitive and powerful investment tools. Especially, with equity investing, a flat fee is charged, with the firm claiming that it charges no trade minimum, no data fees, and no platform fees. Though it is pricier than many other discount brokers, what tilts the scales in its favor is its well-rounded service offerings and the quality and value it offers its clients.
World-class trading platforms
Detailed research reports and Education Center
Assets ranging from stocks and ETFs to derivatives like futures and options
Thinkorswim can be overwhelming to inexperienced traders
Derivatives trading more costly than some competitors
E*TRADE is an online discount trading house that offers brokerage and banking services to individuals and businesses. One of the first brokers to embrace online trading, E*TRADE not only survived both the dot-com bubble and Recession — it thrived. You can choose from two different platforms (one basic, one advanced). E*TRADE is a suitable broker for traders of most skill levels, whether you want to buy mutual funds and hold them for decades or dabble in options swing trading. E*TRADE offers a library of research and education materials to help you out.
TradeStation is for advanced traders who need a comprehensive platform. The brokerage offers an impressive range of investable assets as frequent and professional traders appreciate its wide range of analysis tools. TradeStation’s app is also equally effective, offering full platform capabilities.
Options and futures traders
Active stock traders
Comprehensive trading platform and professional-grade tools
Wide range of tradable securities
Fully-operational mobile app
Confusing pricing structure to leave new traders with a weak understanding of what they pay
Cluttered layout to make navigating TradeStation’s platform more difficult than it should be
$0.005 per shareminimum $1 and maximum 0.5% of trade value; volume discount available
1 Minute Review
Interactive Brokers (IBKR) is a comprehensive trading platform that gives you access to a massive range of securities at affordable prices. With access to over 125 global markets, you can buy assets from all around the world from the comfort of your home or office. Options, futures, forex and fund trading are also available — and most traders won’t pay a commission on any purchase or sale. IBKR is geared primarily toward experienced investors. The platform offers limited assistance and can be a challenge for new users to become acclimated to. The broker’s tiered pricing strategy can also be frustrating for traders who focus on hourly or daily price movements.
Access to foreign markets
Comprehensive mobile app that makes trading simple
Wide range of available account types and tradable assets
Comprehensive, quick desktop platform
Mobile app mirrors full capabilities of desktop version
Access to massive range of tradable assets
Frustrating and confusing tiered pricing
Bloated website that makes finding information a challenge
$0 for stocks and ETFsbroker assited orders an additional $6
$500to open an account
1 Minute Review
eOption is a stock, fund and option trading platform that focuses on low-cost options trading. Its options trading is very affordable at just $0.10 per contract and $1.99 per transaction. The broker also offers a comprehensive options trading course that’s free and educational for both novice investors and advanced traders alike. eOption’s platform is less usable than its competitors, especially for new traders.
Futures and forex trades aren’t currently available, daily market updates are full of jargon and the platform includes very few intuitive features and explainers. Customer service options are also lackluster, and mutual fund transactions are expensive. While eOption might be a great choice for options traders, we recommend other platforms for beginner traders primarily interested in stock and ETF investing.
Options traders looking for low-cost options contracts
Beginner and advanced traders looking for options education
Advanced traders who don’t need a lot of platform guidance
Unbeatable options contracts pricing
Mobile app that mirrors capabilities of desktop app
Free and comprehensive options education
Confusing platform has limited assistance tools
Expensive mutual funds and bond trading
Limited stock and general investing education
Lackluster customer service options
$0when you trade stocks, ETFs, options, and mutual funds online
$0when you trade stocks, ETFs, options, and mutual funds online
1 Minute Review
Easy-to-use and quick to master, Firstrade offers new and veteran traders alike a simple way to start investing with rock-bottom pricing. Firstrade’s platform is simple and streamlined, and it extends this convenience to its mobile app. The company’s $0 commissions on stocks, ETFs, mutual funds and even options make Firstrade especially appealing for frequent traders. Firstrade also offers margin trading, though rates are a bit more expensive than some competitors. Firstrade also currently doesn’t offer access to futures or forex trading, and some more advanced traders may dislike the broker’s simple platform.
New traders looking for a simple platform layout
Native Chinese speakers seeking research and education tools in Chinese
Mobile traders who needs a secure and well-designed app
Simple platform easy enough for even complete novices
Quick Bar tool for easy trading throughout the day
Free access to Morningstar trading reports and other news in both English and Chinese
Secure mobile app with enhanced security and trading features
Simple brokerage platform doesn’t include as many charting tools as competitors
No access to futures or forex markets
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
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 orpurchase bonds. They are less volatile and retain their value better than common stock.
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