Tag: How to Buy Preferred Stock

  • How to Buy Preferred Stock – The Tricky Road Is Now Simpler

    How to Buy Preferred Stock – The Tricky Road Is Now Simpler

    3 min read

    How to Buy Preferred Stock

    by Guy Avtalyon

    KEY POINTS
    • Preferred stocks are hybrid security. Let’s say,  something between bonds and common stocks.
    • The preferred stocks are riskier than bonds but less than common stocks
    • Pay attention to THIS! Don’t buy a preferred stock issue at or near par value.

    I know you’re probably thinking now to buy preferred stock and where to find them? Truth is it isn’t so easy to find them, so let me help you a bit. 

    I’ll give you the additional data that you can’t find ANYWHERE else.

    First of all, preferred stocks are hybrid security. Let’s say,  something between bonds and common stocks. You have to know that they are riskier than bonds but provide higher payments. And that is exactly what we want – higher returns, right?

    By holding preferred stocks, you will receive regular fixed dividends. The procedure of buying them is the same as it is with common stocks. Firstly, you have to choose your broker. The thing you have to check is that your broker has a good and reliable list of preferred stocks. So, check the range of it before any commitment. Well, you will need some personal research on preferred stocks to pick the right one or several from the list of shares your accessible through your broker. Take your time, they are worth your effort.

    Now, you have to recognize preferred stocks that match your interest. Evaluate the companies you have info that will work well in the future. Keep in mind that preferred stocks are long-term investments. 

    You can trade them on the stock market in the same way you would do it with common stocks. 

    Just like bonds, preferred stocks have credit rating and that is also needed to be checked. 

    Where can you get this info?

    From a corporate credit rating bureau. Based on the data you receive from the bureau you will know if investing in preferred stocks is a good choice for you. 

    But there is one tricky part that shouldn’t terrify you. 

    You will see that credit rating for this kind of stocks is lower than it is for bonds. That comes due to their risky nature. As you can see at the beginning of this article, the preferred stocks are riskier than bonds but less than common stocks.

    Let’s go straight to the point. How to buy preferred stocks, where you can find them?

    You have to read balance sheets. In the stockholders’ equity section, you will notice the amount obtained from issuing preferred stock.

    In the income statement, you will find the annual preferred dividends report.

    Analyze issuing companies completely. Put your feelings about some company away. You are not investing based on your feelings. You have to do that based on your investing goals and risk tolerance. You will need a strong understanding of how a company’s stock works before you make a decision.

    Read the stock’s prospectus. It is easy to find them online.

    Preferred stocks offer a bit more than common stocks or bonds.

    Actually, preferred stocks bring great deals. For example, yields average is 6.1%. It is much above the high-yielding sectors of the market, for example utility stocks and real estate investment trusts.

    Where to find preferred stocks?

    Try to find them among banks, and different financial companies, since they issue more than 80% of preferred stocks. Also, you can find them in telecommunications, health care, energy or similar companies.

    Companies usually issue these stocks at $25 per share. That is par value. When investors start trading them, the price will go up or down. It is due to the interest rates. Just like bonds. When the interest rates climb the price of preferred stocks will fall. And vice versa.

    In regular market conditions, preferred stocks should be better than high-quality bonds. They have to provide you steady income. And taxes below those for bonds interest.

    How to buy a preferred stock simply?

    Look here! A necessary starting point is an online broker that provides screening tools. Companies ordinarily give a grace period before they can redeem shares. It is usually 5 years after they issue preferred stocks. Besides that, a company may recall its shares at any time. So, keep a close eye on the call date.
    Check all dates carefully to be sure you have at least 18 months before a company can repurchase shares. 

    I don’t know if you’ll buy it today or in a month or year. But I want you to know this!

    Experience tells that preferred stocks under $23 are riskier, but if they are over $28 the yield could be too low. Moreover, if it is over $28 the potential loss could be bigger if the stock is called at $25 per share. A perfect yield should be between 5% and 7%, say experts. If the yield is higher, the potential risk is bigger.

    Pay attention to THIS! 

    Don’t buy a preferred stock issue at or near par value.

  • Preferred Stock Advantages Explained

    Preferred Stock Advantages Explained

    Preferred Stock Explained
    Take advantage of owning these stocks, they are paying guaranteed dividends, but the owner doesn’t have the voting rights

    By Guy Avtalyon

    Preferred stock signifies an ownership stake in some companies. It is like a share of common stock but less volatile.
    But there are more advantages to hold preferred stocks. For example, they are prioritized when it comes to dividends or bankruptcy. But by owning this stock you will not have the same voting rights as owner of common stock. Actually, you will not have them.

    Preferred stock is similar to bonds. See, with preferred shares, you will have a fixed dividend in continuity. And you can easily calculate the dividend yield. All you have to do is to divide an amount of dividend in the currency by the current price of the stock. Yield is the effective interest rate you earn when you buy a share of the preferred stock.  

    Let’s do some math.

    Assume a preferred stock has an annual dividend of  $6 per share and is trading at $120 per share. So, the yield is $6 divided by $120 which is 0.05. Multiply by 100 to turn to the percentage. The yield is 5%.

    6/120 = 0.05

    0.05 x 100 = 5

    This is regularly based on the standard value ere a preferred stock is sold. It’s generally determined as a percentage of the current market price after the trade starts. This is a difference from a common stock. Common stock has variable dividends that are published by the board of directors and it is never guaranteed. Moreover, a lot of companies don’t pay out to common stocks. 

    The added difference is that this kind of stock has a par value. It is in correlation with the interest rate. If the interest rate increases, the value of preferred stock drops. Also, when the interest rate decreases, the value of this stock will grow. You will not find a similar situation with common stock since its value is determined by supply and demand in the market. 

    Why buy preferred stock?

    Investors frequently buy preferred stock for the income the dividends give. The dividends for them are higher than those issued for common stock. And the other benefit is notable. If the company has to miss out on a dividend it collects, it still must pay preferred stock dividends before any common stock dividends come to the schedule. That is why they carry less risk than common stock. Preferred stock owners must be paid before common stockholders if the company failed or in case of bankruptcy.

    When evaluating the investment potential of preferred stock, it is most important to compare the dividend yield to the yields of the company’s bonds. You will find that preferred stocks often work similarly to bonds.
    Preferred stock is a good choice for investors who don’t want to take a big risk. Moreover, it is less volatile than common stock and provides a better flow of dividends.

    How to buy preferred stock?

    The process is the same as you buy any stock. You can use a broker’s service, doesn’t really matter if it is a discount broker or full-service broker. The main point is that the company has to be publicly-traded, of course. But before you start finding a preferred stock to buy, you must know why should you do that. Why don’t you buy that company’s common stock?
    When buying common stock, you’re actually buying a part of ownership in the company. You’ll have voting right as one of the co-owners. On the other hand, if you buy a preferred stock you’ll almost never get voting right.

    They have regular dividends payments

    When you buy preferred stock, you’ll get regular dividends payments. That is opposite from the owner of common stock that doesn’t have guaranteed dividends. Even a case that the company stops to pay dividends, your unpaid dividends are still yours and once, when the company decides to continue these payments, you’ll receive them.
    The other advantage of buying preferred stocks is that your investment will be repaid in full even if the company goes bankrupt.
    The owner of common stocks will get nothing instead.

    One thing more is present here.

    Those stocks give more options to investors. Let’s explain this. Numerous preferred shares are callable. This means the issuer can purchase them at any time. Investors have a true chance for these shares to be called back at a redemption rate. It can be a notable bonus over their purchase price. The market for preferred shares usually assumes callbacks and prices may be bid up respectively.

    And we must point out one disadvantage again. Its shareholders regularly do not have voting rights as the owners of common stock. It may be a problem for some investors.