Where to Buy Preferred Stock and How the Process Works

Preferred stock offers investors a distinct avenue within the financial markets, blending characteristics found in both common stocks and bonds. This security can serve as an attractive option for those seeking regular income streams and stability in their investment portfolios. Understanding where and how to acquire preferred stock is a fundamental step for individuals considering this investment. This guide aims to clarify the process, from recognizing key features to executing a purchase.

Key Features of Preferred Stock

Preferred stock is an equity instrument, differing significantly from common stock in several aspects. Holders of preferred shares receive fixed dividend payments, often a set percentage of the stock’s par value or a fixed dollar amount. These dividends are paid out before any dividends are distributed to common stockholders, providing a predictable income stream for investors.

They also have priority in a company’s liquidation. Should a company undergo bankruptcy, preferred shareholders have a higher claim on the company’s assets than common stockholders, though their claims are subordinate to bondholders and other creditors. This seniority offers a layer of protection compared to common equity. Preferred stock generally does not carry voting rights, meaning shareholders typically do not participate in corporate governance decisions. This absence of voting power is often a trade-off for the increased dividend preference and asset claim.

Common Types of Preferred Stock

Various types of preferred stock exist, each with specific terms that influence their appeal to investors. Cumulative preferred stock ensures that if a company misses dividend payments, those unpaid dividends accumulate and must be paid to cumulative preferred shareholders before any dividends can be distributed to common shareholders. In contrast, non-cumulative preferred stock does not accrue missed dividends, meaning if a payment is skipped, it is generally lost to the investor.

• Convertible preferred stock allows exchange for common shares, offering potential capital appreciation.
• Callable preferred stock permits the issuing company to repurchase shares at a predetermined price after a specified date, often if interest rates decline.
• Adjustable-rate preferred stock has a dividend rate that fluctuates based on a benchmark interest rate, protecting against interest rate changes.
• Participating preferred stock offers potential for additional dividends if the company meets financial targets.

Where Preferred Stock Can Be Purchased

Preferred stock can be acquired through several channels, primarily through brokerage firms. Online brokerage firms, known for their self-directed accounts and lower commission structures, are a common choice for investors looking to purchase preferred shares. These platforms provide tools and access to a wide range of publicly traded preferred stocks, allowing investors to manage their own trades.

Full-service brokerage firms offer a more personalized approach, providing investment advice, research, and managed accounts. While these services typically come with higher fees or commissions, they can be beneficial for investors who prefer professional guidance or have complex financial needs. Both online and full-service brokers facilitate access to preferred stocks listed on major exchanges. Direct purchase programs from issuing companies are less common for publicly traded preferred stock.

How to Buy Preferred Stock

Purchasing preferred stock generally follows a process similar to buying common stock through a brokerage account. The initial step involves opening a brokerage account with a chosen firm, which typically requires providing personal identification details, such as your name, address, and Social Security number, along with employment and financial information. Once the account is established, it needs to be funded, often through electronic transfers like an Automated Clearing House (ACH) transfer from a linked bank account, which can take a few business days.

After funding the account, investors can search for specific preferred stocks using ticker symbols or screening tools available on the brokerage platform. Preferred stock ticker symbols often include specific identifiers, such as a “p” or “pr” suffix. When placing an order, investors choose between a market order, which executes immediately at the best available price, or a limit order, which specifies a maximum purchase price or minimum selling price. A market order guarantees execution, while a limit order guarantees price but not execution. Upon execution, the trade enters a settlement period, which for most securities transactions in the U.S. is T+1, meaning ownership officially transfers one business day after the trade date.

Dividends received from preferred stock are generally taxable income. Many preferred stock dividends may qualify for favorable tax treatment as “qualified dividends,” which are taxed at lower capital gains rates, typically ranging from 0% to 20%, depending on the investor’s income bracket. To be considered qualified, dividends must meet specific Internal Revenue Service (IRS) holding period requirements. Investors should consult their brokerage firm or a tax professional to understand the specific tax implications for their preferred stock holdings.