How to Buy Preferred Stock

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1Opening a Brokerage Account

2Choosing Your Preferred Stocks

3Executing Your Trade

Other Sections

Expert Q&A

Tips and Warnings

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References

Preferred stock is a hybrid security that falls between bonds and common stock. Preferred stock carries more risk than bonds, but also potentially higher payouts. With preferred stock, you also reap the benefits of regular fixed dividend payments. If you want to invest in preferred stock, you can buy shares using the same basic process you would use to buy common stock.

Steps

Part 1

Part 1 of 3:

Opening a Brokerage Account

1. 
   1
   Choose a broker that best suits your needs. If you don't already have an active account with a brokerage firm, compare the online brokers available and find one that best suits your investment goals and has a wide variety of preferred stock available.

   • Explore the broker's online trading platform and choose one that you find easy to use. If you're new to investing, you're better off to go with a broker who has plenty of resources for beginners.
   • If you're particularly interested in buying preferred stock, check the range that the broker has available before committing to a firm. You may want to do a little research on preferred stocks and make a list of the ones you're particularly interested in, so you can make sure shares will be available through the broker you choose.
2. 
   2
   Evaluate the background of brokers and brokerage firms. Before you open a brokerage account, make sure the firm you've chosen has not had any past registration or licensing problems. You can look them up online for free at https://brokercheck.finra.org.

   • Make sure the phone numbers and addresses you have for the brokerage firm match those listed in Brokercheck. This can help protect you against fraud.
   • Even if a brokerage firm has a clean history with no disciplinary actions or other issues, that is no guarantee that you won't have any problems with them.
3. 
   3
   Choose the type of account you want. Most brokerage firms offer 2 basic types of investment accounts: cash accounts and margin accounts. Margin accounts differ from cash accounts in that you can borrow money from the brokerage to make an initial stock purchase. The securities in your account serve as collateral for that loan.

   • If you're a beginning investor, you're typically better off choosing a cash account. Brokerage firms may not even offer margin accounts unless you are an experienced investor or are willing to fund your account with a significant amount of money.
4. 
   4
   Gather information to open your account. Generally, to open a brokerage account you'll need your Social Security or other tax ID number, government-issued identification, and information about your income and employment status.

   • Like other banks, brokerage firms must report income you earn on your investments to the IRS. They also must verify your identity to fulfill their legal obligations under the USA PATRIOT Act.
   • The brokerage firm also may run a credit check on you, particularly if you've indicated you want to open a margin loan account rather than a cash account.
5. 
   5
   Complete your application to open your account. If you've decided to go with an online broker, you typically can complete your application to open your account online. Information you provide about your identity, employment, and income may be subject to additional verification.

   • New account forms also will ask you for the name and contact information for a trusted contact person. In case something happens to you or your broker is not able to get ahold of you, they may contact this person about your account.
6. 
   6
   Deposit or transfer funds to your account. When your broker notifies you that your account has been opened, you must arrange to meet the minimum funding requirements for that account. If you're transferring money from one investment account to another, the transfer process may take several business days to complete.

   • If you're simply depositing funds directly from a checking or savings account, the process generally doesn't take as long as if you are moving funds between 2 investment accounts. However, it may still take 1 to 3 days depending on weekends and holidays.
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Part 2

Part 2 of 3:

Choosing Your Preferred Stocks

1. 
   1
   Identify preferred stocks that capture your interest. To find good stocks to invest in, think about companies you like and whose products you frequently buy. Preferred stocks are typically considered long-term investments, so you want to choose a company you want to own a piece of, rather than one you simply believe will make you a lot of money.

   • Investing in a company you already like and understand something about also makes it easier for you to evaluate its performance. You can also compare that performance to competitive firms in the same sector.
   • Since preferred stocks are traded on the open stock market just like common stocks, you can watch the performance of a preferred stock you like and see how it does before you make the decision to invest.
2. 
   2
   Check the credit rating for preferred stocks. Like bonds, preferred stocks have a credit rating from an established corporate credit rating bureau, such as Standard & Poor's or Moody's. This credit rating can help you determine whether the preferred stock is a wise investment for you.

   • To check a rating at Standard & Poor's, go to https://www.standardandpoors.com/en_US/web/guest/home and type the name of the company in the "Find a Rating" field. For Moody's, go to https://www.moodys.com/page/lookuparating.aspx and enter the name of the company.
   • Credit ratings for preferred stocks typically are lower than ratings for bonds in the same company. Don't let this scare you off – it simply reflects that preferred stock carries a greater level of risk.
3. 
   3
   Research issuing companies thoroughly. Even if you personally like a company, your personal feelings alone shouldn't determine whether you invest. You do need to have a solid understanding of how the company is managed and how its stock performs before you can make a truly informed decision.

   • Companies must make public disclosures regularly to comply with the regulations of the U.S. Securities and Exchange Commission (SEC). You can access these documents, along with information on how to read and analyze them, by visiting https://www.investor.gov/research-before-you-invest/research/researching-investments.
   • Read the stock's prospectus carefully before you make a decision to invest. You can typically find the full prospectus online. If you went with an online broker, you may be able to access these documents through the investing resources on your trading platform.
4. 
   4
   Evaluate the rights that come with the stock. Preferred stockholders typically don't have voting rights. However, some preferred stock packages may come with limited voting rights or with other features.

   • Each issue of preferred stock is individually customized. A single company may issue several series of preferred stock that have different economic rights, and come with different sets of risks and rewards.
   • Preferred shares also have optional features that you can take advantage of if you desire, such as having the ability to convert your preferred shares into common shares. Choosing any of these options may affect the price you pay for shares.
5. 
   5
   Get advice from your broker. If you still have questions about a preferred stock before you feel comfortable investing, talk to your broker or to another financial advisor and get their opinion. Apart from insuring the stock is a good investment, you also need to be confident that it's a good fit within your portfolio.

   • Many online brokers have a screening tool you can use to filter preferred stocks based on your preferences. While these tools can help you narrow your decision, they don't necessarily take the place of an expert opinion.
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Part 3

Part 3 of 3:

Executing Your Trade

1. 
   1
   Decide how many shares you want to buy. If you've followed the stock for a few weeks before making your purchase, you know the average price it's trading at and whether it's value is rising or falling in the short term. Use that information to determine how many shares you can buy with the cash you have in your brokerage account.

   • If you're a beginning investor, start slow. There's no rule that you have to invest all the cash in your account right away. Buy a few shares and see how they perform. If you like it, you can buy a few more shares. If it turns out you made a mistake, you can get out easily without having lost much.
2. 
   2
   Choose your order type. Since preferred stock is traded just like common stock, you have 4 ways you can place an order for the stock. The most basic type of order is a "market order." You simply state the number of shares you want, and your broker buys that number of shares at the prevailing market price.

   • If prices are volatile, you might want to place a "limit order." With this type of order, you set the maximum amount you're willing to pay per share of the stock. Your broker only purchases the shares if they can get them at or below your limit.
   • A "stop order" creates a trigger point that will activate your order. If you see that the stock is moving and want to buy it when it hits a certain price, you would use this type of order.
   • A stop-limit order combines a stop order and a limit order. The price you set as your stop price triggers your order, while the limit you set provides the maximum amount you're willing to pay.
3. 
   3
   Place your order with your broker. From your online trading platform, go to the page that allows you to make a stock purchase. Select your stock, the number of shares, and the type of order you want to place. Double-check everything before you submit your order to make sure you haven't made a mistake.

   • If you're using an online broker and you need some help, call the customer service number and ask for assistance. Many online brokers also have walk-throughs and other resources to guide you through making your first trade.
4. 
   4
   Monitor performance and re-balance your portfolio as necessary. Since preferred stock is typically considered a more long-term investment, you don't necessarily have to watch its movement every day. However, at least once a year you should evaluate its performance and make sure owning the stock is still advancing your investment goals.

   • If you've diversified your portfolio with other securities, make sure the balance ratio is still the same as you intended when you first set up your portfolio.
   • If one stock is out-performing another, it may have caused your portfolio to become unbalanced. You can re-balance by selling part of that stock and investing that money in others to even things out.
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Expert Q&A

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  What is the best way to learn stock?

  

  Chad Seegers, CRPC®
  Certified Retirement Planning Counselor

  Chad Seegers is a Certified Retirement Planning Counselor (CRPC®) for Insight Wealth Strategies, LLC in Houston, Texas. Prior to this, Chad worked as a Private Wealth Advisor for Sagemark Consulting for over ten years, where he became a select member of their Private Wealth Services. With over 15 years of experience, Chad specializes in retirement planning for oil and gas employees and executives as well as estate and investment strategies. Chad is a supporting member of the World Affairs Council and an emerging leader with the Global Independence Center (GIC).

  

  Chad Seegers, CRPC®

  Certified Retirement Planning Counselor

  Expert Answer

  There are so many very useful blogs out there in the investment community that are great from being aggregators of research, sharing information, collaboration, any white papers or research papers that have been published in journals that can actually be published, and people can go out and see the stuff, see what professionals are looking at. It is a constant learning process, the clinical work is never done.

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Tips

• Remember that buying stocks is like buying a present value of future cash flows of businesses. What many don't understand is that there's always someone selling shares for a reason you may not understand, maybe they did exceptionally well, and they have to sell those shares, because they need $20,000. Maybe you're simply buying the shares because you don't care what's going to happen for 20 years with a particular company. So a day to day movement doesn't matter to you. So, on every side of a transaction, there's a buyer and a seller.
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Warnings

• This article primarily discusses buying preferred stock in the US. Other countries may have similar investment options. If you live in another country, talk to a broker or financial advisor to discover the investment options available to you.
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