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Ready to diversify your portfolio and potentially boost your income? Preferred stocks could be an excellent addition! Charles Schwab, a leading brokerage firm, offers a robust platform to help you navigate the world of preferred securities. This comprehensive guide will walk you through every step of buying preferred stock on Charles Schwab, from understanding what they are to placing your first trade.
Understanding Preferred Stock: A Quick Primer
Before we dive into the "how-to," let's quickly grasp what preferred stock is. Imagine a hybrid vehicle – part car, part boat. Preferred stock is similar, combining characteristics of both common stocks and bonds.
- Fixed Income Potential: Like bonds, preferred stocks typically pay a fixed dividend at regular intervals, often quarterly. This can provide a more predictable income stream compared to common stock dividends, which can fluctuate or be cut.
- Priority in Payments: In the unfortunate event of a company's liquidation, preferred stockholders have a higher claim on the company's assets and earnings than common stockholders. This
means they get paid back before common shareholders. - No Voting Rights (Usually): Unlike common stock, preferred shares generally do not come with voting rights, meaning you won't have a say in company decisions.
- Less Price Volatility: Preferred stocks tend to be less volatile in price than common stocks, offering a degree of stability, though they are still subject to market fluctuations, particularly interest rate changes.
Now that we have a basic understanding, let's get into the actionable steps!
Your Step-by-Step Guide to Buying Preferred Stock on Charles Schwab
Step 1: Are You Ready? Assess Your Investment Goals and Risk Tolerance
Before you even log into your Charles Schwab account, let's talk about you. Why are you interested in preferred stock? Are you seeking consistent income, capital preservation, or both?
- Income Focus: Preferred stocks are often favored by income-oriented investors due to their regular dividend payments.
- Diversification: They can offer diversification from common stock and traditional bond holdings.
- Risk Assessment: While generally less volatile than common stocks, preferred stocks do carry risks. These include interest rate risk (their prices typically move inversely to interest rates), credit risk (the risk that the issuer may default on dividend payments or redemption), and call risk (the issuer may redeem the stock early). Are you comfortable with these risks?
Take a moment to reflect on your financial situation, your investment horizon, and how much risk you're willing to take. This self-assessment is crucial for making informed investment decisions. If you're unsure, Schwab offers resources and financial consultants to help you define your goals.
Step 2: Open and Fund Your Charles Schwab Account
If you don't already have one, your first practical step is to open a brokerage account with Charles Schwab.
- Account Types: Schwab offers various account types, including individual brokerage accounts, joint accounts, and IRAs (Roth or Traditional). Choose the one that best suits your needs.
- Online Application: You can typically open an account online in about 10 minutes. The process is straightforward, requiring personal information, identification, and financial details.
- Funding Your Account: Once your account is open, you'll need to fund it. Schwab provides several convenient options:
- Electronic Funds Transfer (EFT): Link your bank account for easy transfers.
- Wire Transfer: For larger sums or quicker access to funds.
- Check Deposit: Mail a check or deposit it via the Schwab mobile app.
- Account Transfer (ACATS): If you have an existing account at another brokerage, you can transfer your assets to Schwab. This is often a seamless process.
Pro Tip: Ensure your account is fully funded before you attempt to place a trade. Schwab may have minimum balance requirements for certain features or types of investments.
Step 3: Researching Preferred Stock on Schwab's Platform
Now that your account is ready, it's time to find the right preferred stocks for you. Charles Schwab offers excellent research tools to aid your search.
Sub-heading: Utilizing Schwab's Research Tools
- Navigate to Research: Log in to your Schwab account and look for the "Research" or "Markets & Research" section.
- Preferred Stock Screener: Schwab has a dedicated "Preferred Shares" screener under their "Stocks" research tools. This is an invaluable resource for narrowing down your options.
- Filter by Criteria: You can filter preferred stocks based on various criteria such as:
- Issuer Industry/Sector: Do you want to invest in banking, utilities, or another sector?
- Dividend Yield: This is a key metric for preferred stocks, indicating the annual income as a percentage of the stock's price.
- Credit Rating: While preferred stocks are generally rated lower than a company's bonds, you can still filter by credit agency ratings (e.g., S&P, Moody's) to assess creditworthiness.
- Call Date/Maturity: Many preferred stocks are "callable," meaning the issuer can redeem them at a certain price after a specific date. You can filter by call date or maturity.
- Cumulative vs. Non-Cumulative: This is an important distinction. Cumulative preferred stock means any missed dividends must be paid back to shareholders before common shareholders receive dividends. Non-cumulative preferred stock does not have this obligation.
- Exchange: You can filter by the exchange where the preferred stock is listed (e.g., NYSE, Nasdaq).
- Filter by Criteria: You can filter preferred stocks based on various criteria such as:
- Individual Preferred Stock Analysis: Once you've identified some potential preferred stocks, click on their ticker symbols to access detailed information.
- Quote Details: View current prices, daily ranges, and 52-week highs/lows.
- Dividends: Check dividend payment history, frequency, and ex-dividend dates.
- Company Profile: Understand the issuing company's business and financial health.
- Financials & Reports: Access financial statements, analyst reports (from Schwab Equity Ratings, Morningstar, Argus, etc.), and SEC filings (like prospectuses) to conduct thorough due diligence. The prospectus is especially important for understanding the specific terms and risks of a preferred stock.
- News: Stay updated on any company news that might impact the preferred stock.
Sub-heading: Key Metrics to Consider
When evaluating preferred stocks, pay close attention to:
- Yield to Call (YTC) and Yield to Maturity (YTM): If the preferred stock is callable or has a maturity date, these yields provide a more accurate picture of your potential return.
- Credit Quality of the Issuer: Research the financial strength and stability of the company issuing the preferred stock.
- Liquidity: Consider how easily you can buy or sell the preferred stock. Some preferred issues may have lower trading volumes than common stocks.
Step 4: Placing Your Order for Preferred Stock
Once you've done your research and identified the preferred stock you want to buy, it's time to place your trade.
- Access the Trade Ticket: On Schwab's platform, look for a "Trade" or "Place Order" button. You'll typically be directed to an "All-In-One Trade Ticket."
- Enter the Stock Symbol: Input the ticker symbol for the preferred stock you wish to purchase. Be careful to enter the correct symbol, as many companies have both common and preferred stock listed.
- Specify Trade Action: Select "Buy."
- Enter Quantity: Specify the number of shares you want to buy. Preferred stocks often have a par value of $25 or $1,000, so be mindful of the share price when determining your quantity.
- Choose Order Type: This is a critical step.
- Market Order: This order will execute immediately at the best available current market price. While simple, it can lead to unexpected prices, especially for less liquid preferred stocks.
- Limit Order: This is generally recommended for preferred stock. A limit order allows you to specify the maximum price you are willing to pay per share. Your order will only execute if the stock's price reaches your specified limit or better. This gives you more control over your entry price.
- Set Time in Force: This determines how long your order remains active.
- Day Order: Your order will expire at the end of the trading day if not filled.
- Good 'Til Canceled (GTC): Your order remains active for a longer period (e.g., 60 days) unless filled or you cancel it.
- Review and Confirm: Always, always review your order details carefully before submitting. Check the symbol, quantity, price, and order type to ensure everything is correct.
- Place Order: Click "Place Order" or "Confirm Trade."
Sub-heading: Understanding Trading Hours
- The regular U.S. exchange market hours are typically 9:30 a.m. to 4:00 p.m. ET.
- Schwab offers extended hours trading (pre-market and after-hours sessions). While some preferred stocks may trade during these times, liquidity can be lower and prices more volatile. Limit orders are especially crucial for extended-hours trading.
Step 5: Monitoring Your Investment
Congratulations! You've bought preferred stock on Charles Schwab. But your job isn't over.
- Track Performance: Regularly monitor the performance of your preferred stock through your Schwab account dashboard.
- Dividend Payments: Keep an eye on dividend payment dates and ensure you're receiving your expected income.
- Company News: Stay informed about the issuing company's financial health and any corporate actions that could affect your preferred stock.
- Interest Rate Environment: Since preferred stock prices are sensitive to interest rates, be aware of broader interest rate trends.
- Call Risk: If your preferred stock is callable, be mindful of upcoming call dates. If interest rates have fallen since the preferred stock was issued, the company may choose to call it.
Fees Associated with Buying Preferred Stock on Charles Schwab
Schwab generally offers $0 online listed equity trade commissions, which typically applies to preferred stocks listed on major exchanges. However, there might be other fees to consider:
- Broker-Assisted Trades: If you place a trade through a Schwab representative, a commission (e.g., $25) may apply.
- Regulatory Fees: Small regulatory fees like the SEC Section 31 Fee and FINRA Trading Activity Fee may be assessed on sales.
- ADR Fees: If you're investing in an American Depositary Receipt (ADR) of a foreign preferred stock, there might be additional fees.
- Other Potential Fees: Always review Schwab's pricing guide for the most up-to-date and comprehensive information on all potential fees.
FAQs: How to...
Here are 10 frequently asked questions, starting with "How to," related to buying preferred stock on Charles Schwab, with quick answers:
How to choose the right preferred stock on Charles Schwab?
- Answer: Use Schwab's preferred stock screener to filter by industry, dividend yield, credit rating, call features, and cumulative/non-cumulative status. Then, conduct thorough due diligence on individual issuers.
How to find preferred stock ticker symbols on Charles Schwab?
- Answer: You can find preferred stock ticker symbols by searching on Schwab's research pages or by using their preferred stock screener, which often displays the relevant symbols.
How to understand the risks of preferred stock before buying on Charles Schwab?
- Answer: Thoroughly read the prospectus of any preferred stock you consider, and review Schwab's educational materials on preferred securities to understand risks like interest rate risk, credit risk, and call risk.
How to place a limit order for preferred stock on Charles Schwab?
- Answer: On the trade ticket, select "Limit" as your order type and specify the maximum price per share you are willing to pay.
How to track dividend payments for my preferred stock on Charles Schwab?
- Answer: You can track your dividend payments in your Schwab account's activity or positions section, or by checking the dividend history for the specific preferred stock on the research page.
How to transfer preferred stock from another brokerage to Charles Schwab?
- Answer: Initiate an Account Transfer (ACATS) through Schwab's online transfer tool. You'll need information from your current brokerage account.
How to sell preferred stock on Charles Schwab?
- Answer: Similar to buying, navigate to the trade ticket, select "Sell," enter the symbol and quantity, choose your order type (limit order is often recommended), and confirm.
How to get help with preferred stock investing from Charles Schwab?
- Answer: You can contact Schwab's customer service via phone (800-435-4000), online chat, or visit a local branch for assistance from their investment professionals.
How to research the credit rating of a preferred stock issuer on Charles Schwab?
- Answer: Schwab's preferred stock screener and individual stock research pages often display credit ratings from agencies like Standard & Poor's and Moody's.
How to access extended hours trading for preferred stock on Charles Schwab?
- Answer: While preferred stock generally trades during regular market hours, Schwab offers extended hours on their platforms; however, only limit orders are accepted for these sessions due to lower liquidity and increased volatility.
