How to Buy Preferred Shares in an Investment Account

Investing in preferred shares offers a distinct avenue for individuals seeking specific investment characteristics within their portfolio. These securities represent a unique class of ownership, differing from common stock. Understanding their structure and the process of acquiring them is a foundational step for any investor. This article explores how preferred shares function and outlines the practical steps involved in purchasing them through an investment account.

Understanding Preferred Shares

Preferred shares are a type of equity security that represents a claim on a company’s assets and earnings, senior to common stock. Holders typically receive fixed dividend payments, which are paid out before any dividends are distributed to common stockholders. This provides a more predictable income stream compared to the variable dividends often associated with common stock.

In the event of a company’s liquidation, preferred shareholders have a higher claim on the remaining assets than common stockholders, though their claims are subordinate to those of bondholders and other creditors. While preferred shares offer this priority, they generally do not carry voting rights in corporate governance matters, unlike common stock. Preferred shares are often considered hybrid securities because they combine features of both stocks and bonds.

Cumulative preferred stock stipulates that if any dividend payments are missed, these “dividends in arrears” must be paid to cumulative preferred shareholders before any dividends can be paid to common stockholders. In contrast, non-cumulative preferred stock does not entitle investors to recoup any missed dividends; if a payment is skipped, it is generally lost.

Convertible preferred stock gives the holder the option to exchange their preferred shares for a predetermined number of the company’s common shares after a specified date. This feature allows investors to potentially participate in the common stock’s price appreciation. Callable preferred stock includes a provision allowing the issuing company to repurchase, or “call,” the shares from investors at a predetermined price on or after a specified date.

Establishing a Brokerage Account

Before purchasing preferred shares, an investor must establish and fund a brokerage account, which serves as the gateway to the financial markets. Choosing a suitable brokerage firm is the initial step, with options ranging from full-service brokers offering personalized advice to online discount brokers providing self-directed trading platforms. Online brokers often feature commission-free trading for many securities, including stocks and exchange-traded funds.

Opening an investment account typically requires providing personal and financial information to comply with regulatory requirements. This includes your legal name, current address, Social Security number or other tax identification, and details about your employment status and financial background. You will also need to provide documentation such as a photo ID and a recent utility bill or bank statement to verify your identity and address.

Once the account application is approved, the next step involves funding the account. Common methods for transferring funds include electronic transfers directly from a bank account (ACH transfers), sending a physical check, or initiating a wire transfer. Electronic transfers are generally convenient, with funds typically becoming available for trading within one to three business days.

Executing the Purchase

With a funded brokerage account, the process of buying preferred shares involves locating the desired security and placing an order through the trading platform. Preferred shares, like common stocks, are identified by unique ticker symbols, though their formats can vary between exchanges and brokerage systems.

To find a specific preferred share, investors can utilize the search function on their brokerage platform by entering the company name or the preferred stock’s ticker symbol. Many platforms also offer screeners that allow investors to filter preferred shares based on criteria like dividend yield, industry, or call features. Once the desired preferred share is identified, the investor can proceed to place a buy order.

When placing a buy order, investors typically specify the ticker symbol, the number of shares they wish to purchase, and the order type. A market order instructs the broker to buy the shares immediately at the best available price, which can be useful for quickly executing a trade but may result in a price slightly different from what was anticipated. A limit order allows the investor to set a maximum price they are willing to pay per share, ensuring the purchase is only executed if the market price falls to or below that specified limit. After reviewing all the order details, including estimated costs, the investor confirms the transaction.

Evaluating Preferred Share Investments

Selecting suitable preferred share investments requires a careful evaluation of several factors beyond just the dividend rate. Analyzing the financial health and creditworthiness of the issuing company is important, as this directly impacts its ability to consistently pay dividends and meet redemption obligations. Major credit rating agencies, such as Standard & Poor’s, Moody’s, and Fitch, assign ratings to preferred shares, which can indicate the issuer’s financial stability. These ratings are generally lower than those for the same company’s bonds, reflecting the preferred shares’ subordinate position in the capital structure.

Understanding the dividend yield is another consideration, as it represents the annual income generated relative to the share’s price. While preferred shares offer fixed dividends, the actual yield an investor receives depends on the price paid for the share in the market. Investors should also carefully examine call provisions, which grant the issuer the right to redeem the shares at a set price after a specified date. If a company calls its preferred shares, investors receive the call price, which may include a premium over the par value, but they then face the task of reinvesting those proceeds, possibly at a lower yield if interest rates have declined.

Changes in prevailing interest rates can significantly affect the market price of preferred shares. When interest rates rise, the value of existing preferred shares with lower fixed dividend rates may decline, as newly issued preferred shares or bonds will offer more attractive yields. Conversely, if interest rates fall, existing preferred shares with higher fixed dividend rates may become more appealing, potentially increasing their market value. This inverse relationship means investors should consider the current interest rate environment and its potential future trajectory when evaluating preferred share investments.