Preferred Stock Options in the United States
Preferred stocks, also known as preferred shares or simply prefs, are a type of investment that offer investors a combination of characteristics from both stocks and bonds. These securities represent ownership in a company but typically do not carry voting rights like common stocks. Instead, preferred stockholders receive fixed dividends at regular intervals and have priority over common shareholders when it comes to receiving payments in case of liquidation.
In the United States, there are various options available for individuals looking to invest in preferred stocks. This article will provide an overview of these options and discuss the benefits and considerations associated with each.
1. Traditional Preferred Stocks:
Traditional preferred stocks are issued by corporations and traded on major U.S. stock exchanges such as the New York Stock Exchange (NYSE) or NASDAQ. These shares pay fixed dividends to their holders, usually on a quarterly basis. They can be classified into different categories based on factors such as cumulative vs non-cumulative dividends, callable vs non-callable status, convertible vs non-convertible features, and participating vs non-participating rights.
2. Preferred ETFs:
For investors looking for diversification within the preferred stock asset class without having to select individual securities themselves, there are exchange-traded funds (ETFs) available that track indexes composed of preferred stocks. These ETFs provide exposure to a basket of diversified preferred stocks while offering liquidity through trading on major exchanges.
3. Preferred Mutual Funds:
Similar to ETFs, mutual funds focused on preferred stocks offer diversification across multiple holdings managed by professional fund managers. Investors can choose from actively managed mutual funds or passively managed index funds.
4. Closed-End Funds:
Closed-end funds specializing in preferred stocks function similarly to mutual funds but trade like regular stocks on an exchange throughout the day at market prices that may differ from their net asset value (NAV). These funds often employ leverage strategies aiming for higher returns but come with additional risks.
5. Preferred Stock Brokers:
To invest in preferred stocks, individuals can utilize online brokerage platforms that provide access to different exchanges and investment products. Some popular brokers in the United States include Fidelity, Charles Schwab, TD Ameritrade, E*TRADE, and Interactive Brokers.
6. Direct Purchases from Companies:
Certain companies offer investors the option to purchase preferred stocks directly from them, bypassing traditional brokerages. This approach may be suitable for those who prefer a more direct relationship with the issuing company and potentially lower costs associated with middlemen.
7. Over-the-Counter (OTC) Market:
While most preferred stocks trade on major stock exchanges, there is also an over-the-counter market where certain securities are traded directly between buyers and sellers without being listed on a formal exchange. Investing through OTC markets requires caution as these transactions may have less transparency and liquidity compared to exchange-traded securities.
8. Crowdfunding Platforms:
In recent years, crowdfunding platforms have emerged as alternative avenues for investing in preferred stocks issued by startups or small businesses looking to raise capital. These platforms allow individual investors to participate in private placements of preferred shares alongside institutional investors.
It’s important for potential investors to consider several factors before diving into preferred stock investments:
a) Risk Profile: While considered less risky than common stocks due to their fixed dividend payments and higher priority during liquidation events, preferred stocks still carry investment risk. Understanding the characteristics of each security is crucial for assessing risk levels.
b) Yield vs Price Appreciation: Preferred stocks generally offer higher yields compared to common stocks or bonds but tend to have limited price appreciation potential. Investors should evaluate their investment goals and income needs when considering this asset class.
c) Interest Rate Sensitivity: Most preferred stock dividends are fixed at issuance but can be influenced by changes in interest rates depending on the terms of the security. Rising interest rates can impact prices negatively, so investors should be aware of this relationship.
d) Credit Quality: Evaluating the creditworthiness of the issuer is crucial as it directly affects the ability to pay dividends and honor redemption or call provisions. Credit rating agencies provide assessments of the financial strength and creditworthiness of companies issuing preferred stocks.
e) Tax Implications: Preferred stock dividends are typically taxed at a lower rate than interest income from bonds but higher than qualified dividend rates for common stocks. Investors should consult with tax professionals to understand their specific tax obligations.
f) Diversification: As with any investment, diversifying across different asset classes, sectors, industries, and geographies is important for managing risk. This can be achieved by investing in multiple preferred stocks from various issuers or utilizing diversified funds.
In conclusion, individuals looking to invest in preferred stocks in the United States have several options available to them. From traditional shares traded on major exchanges to ETFs, mutual funds, closed-end funds, direct purchases from companies or crowdfunding platforms – each option has its own benefits and considerations. Understanding one’s risk tolerance, investment goals, and conducting thorough research are essential before making any investment decisions.