How to Invest in Preferred Stocks
|Perfect Number of Pages to Order
How to Invest in Preferred Stocks
Investing in preferred stocks can be a viable strategy for those looking to diversify their portfolio and generate income. Preferred stocks are hybrid securities that combine characteristics of both common stocks and bonds. They are issued by companies and trade on exchanges, like common stocks, but they offer fixed dividend payments, like bonds. In this article, we will discuss what preferred stocks are, how to invest in them, and the advantages and disadvantages of investing in them.
What are preferred stocks?
Preferred stocks are securities that represent ownership in a company, similar to common stocks. However, they have a higher claim on the company’s assets and earnings than common stocks. Unlike common stocks, preferred stocks offer fixed dividend payments, which are paid out before any dividends are paid to common stockholders. These dividend payments are typically higher than the dividends paid on common stocks, which makes them an attractive investment for income-seeking investors.
How to invest in preferred stocks?
There are a few ways to invest in preferred stocks:
Individual stocks: One can invest in individual preferred stocks just like common stocks, through a brokerage account. The stocks can be bought and sold on a stock exchange like the NYSE or NASDAQ.
Preferred stock mutual funds: Another way to invest in preferred stocks is through mutual funds that specialize in preferred stocks. These funds invest in a portfolio of preferred stocks issued by different companies, providing investors with diversification.
Preferred stock ETFs: Similar to mutual funds, exchange-traded funds (ETFs) can provide investors with exposure to a diversified portfolio of preferred stocks. ETFs trade on exchanges like common stocks and offer lower fees than mutual funds.
Advantages of investing in preferred stocks
Fixed dividend payments: Preferred stocks offer fixed dividend payments, which are attractive to investors seeking a regular income stream.
Higher yields: Preferred stocks generally offer higher yields than common stocks and bonds, making them an attractive investment for income-seeking investors.
Higher priority in case of bankruptcy: In the event of bankruptcy, preferred stockholders have a higher claim on a company’s assets than common stockholders, which can provide a degree of safety to investors.
Diversification: Investing in preferred stocks can provide diversification to a portfolio, especially if the stocks are issued by different companies and industries.
Disadvantages of investing in preferred stocks
Interest rate risk: Preferred stocks are sensitive to changes in interest rates, and as interest rates rise, the value of preferred stocks may decline.
Lower potential for capital appreciation: Unlike common stocks, preferred stocks have limited potential for capital appreciation, which may be a disadvantage for investors seeking higher returns.
Credit risk: Like bonds, preferred stocks carry credit risk. If the company that issues the preferred stock experiences financial difficulties, it may be unable to pay the dividend payments or even the principal amount of the preferred stock.
Lack of voting rights: Preferred stockholders generally do not have voting rights in the company, which means they have limited influence over the company’s decisions.
Investing in preferred stocks can be a viable strategy for those looking to diversify their portfolio and generate income. They offer fixed dividend payments, higher yields, and higher priority in case of bankruptcy, making them attractive to income-seeking investors. However, they also carry interest rate risk, credit risk, lower potential for capital appreciation, and lack of voting rights, which investors should consider before investing in them. As with any investment, investors should do their due diligence and consult with a financial advisor before investing in preferred stocks.