This guide will walk you through the process of buying preferred stock on E*TRADE, a popular online brokerage platform. Preferred stocks can be an attractive investment for income-seeking investors due to their fixed dividend payments and priority in liquidation over common stock. However, they also come with their own set of risks. Let's dive in!
Your Gateway to Preferred Stock: A Step-by-Step E*TRADE Guide
Are you looking to add a steady stream of income to your investment portfolio? Have you heard about preferred stocks and their unique advantages? If so, you're in the right place! Buying preferred stock on E*TRADE can be a straightforward process, but like any investment, it requires careful consideration and understanding. This comprehensive guide will take you through each step, ensuring you're well-equipped to make informed decisions.
Step 1: Understanding Preferred Stock – Is It Right for YOU?
Before we even touch the E*TRADE platform, let's ensure you have a solid grasp of what preferred stock is and if it aligns with your financial goals.
What Exactly IS Preferred Stock?
Preferred stock is a hybrid security that combines features of both bonds and common stocks. Here's a breakdown:
Fixed Dividends: Unlike common stock dividends, which can fluctuate or be suspended, preferred stock typically pays a fixed dividend at regular intervals (monthly or quarterly). This makes them appealing to income-focused investors.
Priority in Payments: In the event of a company's liquidation or financial distress, preferred shareholders have a higher claim on the company's assets and income than common shareholders. They get paid before common stockholders, though after bondholders and other creditors.
No Voting Rights (Typically): A key difference from common stock is that preferred shareholders generally do not have voting rights, meaning they have little to no say in the company's management decisions.
Less Volatile: Preferred stocks tend to be less volatile than common stocks due to their fixed-income nature.
Callable Feature: Many preferred stocks are callable, meaning the issuing company can buy them back at a specified price after a certain date. This can limit potential capital appreciation.
Why Consider Preferred Stock? The Pros
Steady Income Stream: The predictable fixed dividends are a major draw for investors seeking regular income.
Dividend Priority: You're higher up the payment ladder than common stockholders.
Potential for Higher Yields: Preferred stocks often offer higher dividend yields compared to common stocks or even some bonds from the same company.
Less Volatility: Generally, preferred stocks experience smaller price swings than common stocks.
What are the Risks? The Cons
Interest Rate Sensitivity: Like bonds, preferred stock prices are sensitive to interest rate changes. When interest rates rise, the value of existing preferred stocks (with lower fixed dividends) tends to fall.
No Voting Rights: You won't have a say in company decisions.
Limited Capital Appreciation: Due to their fixed dividend and callable nature, preferred stocks generally have less capital appreciation potential than common stocks.
Credit Risk: The ability of the company to pay dividends depends on its financial health. If the company struggles, dividends can be suspended (especially for non-cumulative preferreds).
Subordinated to Bonds: While preferred over common stock, they are still subordinate to all debt holders (like bondholders) in a liquidation.
Lower Liquidity (Sometimes): Some preferred stocks, especially those from smaller issuers, might have lower trading volume, making them harder to buy or sell quickly at your desired price.
Ask yourself: Am I seeking a consistent income stream? Am I comfortable with less capital appreciation potential? Do I understand the interest rate risk? If your answers align with the characteristics of preferred stock, proceed to the next step!
Step 2: Opening and Funding Your E*TRADE Account
To buy preferred stock on E*TRADE, you'll need an active and funded brokerage account.
A. Opening Your E*TRADE Account
If you don't already have one, follow these steps:
Visit the ETRADE Website:* Go to the official E*TRADE website (us.etrade.com).
Click "Open an Account": You'll typically find this prominently displayed on the homepage.
Choose Your Account Type: For investing in preferred stock, a standard brokerage account is usually what you'll need. E*TRADE also offers various retirement accounts (IRAs), managed portfolios, and more.
Complete the Application: Be prepared to provide personal information such as your Social Security Number, employment details, and financial information. This is a standard requirement for all brokerage accounts.
Review and Submit: Carefully review all the information before submitting your application.
Verification Process: E*TRADE will verify your identity. This might involve electronic verification or requiring you to submit additional documents.
B. Funding Your E*TRADE Account
Once your account is open, you'll need to deposit funds to start trading. E*TRADE offers several ways to do this:
Electronic Funds Transfer (EFT): This is often the easiest and most common method. You can link your bank account to your E*TRADE account and transfer funds electronically. Transfers typically take 1-3 business days.
Wire Transfer: For faster access to funds, you can initiate a wire transfer from your bank. Wire transfers are usually available on the same day or within a few hours.
Check Deposit: You can mail a check or use E*TRADE's mobile check deposit feature through their app.
Account Transfer (ACATS): If you have an existing brokerage account at another firm, you can transfer your entire account or specific assets to E*TRADE. This process can take a few business days to a couple of weeks.
Important Note: Ensure your funds have settled before attempting to place a trade. Unsettled funds may prevent you from executing certain orders.
Step 3: Researching Preferred Stock Opportunities on E*TRADE
This is where the real work begins! E*TRADE provides a wealth of research tools to help you identify suitable preferred stocks.
A. Navigating the E*TRADE Platform
Log In: Access your E*TRADE account via their website or mobile app.
Locate the "Research" or "Investments" Section: You'll typically find a menu or tab dedicated to research and investment tools.
Look for "Stocks," "ETFs," or "Bonds": While preferred stocks are equity, they often have bond-like characteristics and can sometimes be found within bond or fixed income screens, or listed alongside common stocks. You might also find them under "Fixed Income" or a "Preferreds" specific section if E*TRADE has one.
B. Identifying Preferred Stock Issues
Preferred stocks are often issued by specific types of companies. You'll frequently find them from:
Financial Institutions: Banks, insurance companies, and other financial firms are common issuers.
Utility Companies: These often issue preferred stock to finance infrastructure projects.
Real Estate Investment Trusts (REITs): REITs commonly use preferred stock for financing.
C. Using E*TRADE's Screening Tools
E*TRADE offers powerful screeners to filter through thousands of securities. Look for a stock or ETF screener and apply filters specifically for preferred stock.
"Security Type" or "Asset Class": See if there's an option for "Preferred Stock" or "Hybrid Securities."
Dividend Yield: Screen for preferred stocks with your desired dividend yield. Remember, higher yields often imply higher risk.
Credit Rating: Look for credit ratings from agencies like Standard & Poor's or Moody's. Preferred stocks are typically rated lower than a company's bonds but higher than its common stock.
Callable Date: Check the callable date. A preferred stock that is callable soon might not be ideal if you're looking for long-term income.
Cumulative vs. Non-Cumulative:
Cumulative Preferred Stock: If the company misses a dividend payment, they must pay all missed dividends before they can pay any dividends to common shareholders. This offers more protection.
Non-Cumulative Preferred Stock: If a dividend is missed, it's gone forever. These are riskier.
Convertible vs. Non-Convertible:
Convertible Preferred Stock: Gives you the option to convert your preferred shares into a fixed number of common shares at a predetermined price. This offers potential for capital appreciation if the common stock performs well.
Non-Convertible Preferred Stock: Cannot be converted into common shares.
D. Analyzing Individual Preferred Stocks
Once you've narrowed down your choices, dig deeper into each preferred stock:
Company Financials: Review the issuing company's financial statements. Is the company stable and profitable enough to consistently pay its preferred dividends?
Prospectus: Always read the prospectus for the specific preferred stock. This document contains crucial details about the terms, conditions, dividend rate, callable features, and risks.
Market Price vs. Par Value: Preferred stocks are issued with a par value (often $25 or $100). The market price can fluctuate above or below this.
Yield to Call (YTC) and Yield to Maturity (YTM): If the preferred stock has a callable date or a maturity date, understand these yield calculations as they reflect the true return you might expect.
Step 4: Placing Your Preferred Stock Order
Once you've identified the preferred stock you want to buy, it's time to place your order on E*TRADE.
A. Accessing the Trade Ticket
Search for the Symbol: In the E*TRADE platform, use the search bar to find the preferred stock by its ticker symbol. Preferred stock symbols often have a special suffix (e.g., ABC-P for preferred shares of company ABC, or ABCPR).
Click "Trade" or "Buy": On the security's quote page, you'll see an option to "Trade" or "Buy."
B. Filling Out the Order Ticket
The order ticket will require several pieces of information:
Action: Select "Buy."
Quantity: Enter the number of preferred shares you wish to purchase.
Order Type: This is crucial.
Market Order: Executes immediately at the best available price. Use with caution for less liquid preferred stocks, as the price could move unfavorably.
Limit Order: Allows you to specify the maximum price you're willing to pay per share. Your order will only execute if the stock reaches that price or lower. This is generally recommended for preferred stock, especially if liquidity is a concern.
Stop Order: Less common for buying, but useful for selling to limit losses.
Duration/Time in Force:
Day: The order is good only for the current trading day. If not filled, it expires.
Good-Til-Canceled (GTC): The order remains active until it's executed or you cancel it (typically up to 60 days on E*TRADE).
Preview Order: Always preview your order carefully before submitting. Double-check the symbol, quantity, price, and order type.
Place Order: Confirm and place your order.
C. Monitoring Your Order
Order Status: After placing your order, check its status in your "Orders" or "Activity" tab. It might be "Pending," "Partially Filled," or "Filled."
Notifications: E*TRADE can send you email or mobile notifications when your order is executed.
Step 5: Managing Your Preferred Stock Investment
Buying preferred stock is just the beginning. Ongoing management is key.
A. Tracking Dividends
Dividend Statements: E*TRADE will provide statements detailing your dividend payments.
Reinvestment: You may have the option to automatically reinvest your dividends back into more shares of the preferred stock (if available and cost-effective).
B. Monitoring Performance
Portfolio View: Regularly check your E*TRADE portfolio to see the current value of your preferred stock holdings.
Company News: Stay informed about the issuing company's financial health and any news that could impact its ability to pay dividends.
Interest Rate Environment: Keep an eye on prevailing interest rates, as they will influence the market value of your preferred stocks.
C. Understanding Tax Implications
Dividends from preferred stocks are typically taxed as ordinary income, though some may qualify for favorable qualified dividend tax rates. Consult a tax professional to understand the specific tax implications for your situation.
Step 6: Considering Your Exit Strategy
Even for income-focused investments, having an exit strategy is wise.
Selling on E*TRADE: If you decide to sell your preferred stock, the process is similar to buying. You'll select "Sell" on the trade ticket and choose your desired order type (usually a limit order).
Callable Events: Be aware of the callable features. If the company calls back your preferred shares, you will receive the call price (usually the par value) plus any accrued dividends. This can happen if interest rates decline, making it cheaper for the company to issue new preferred stock at a lower dividend rate.
Changing Market Conditions: If interest rates rise significantly, the market value of your preferred stock might drop, and you may decide to sell at a loss or hold for the consistent dividend income.
10 Related FAQ Questions
How to research preferred stock effectively on E*TRADE?
Use E*TRADE's screening tools, filtering by "Preferred Stock" in security type, and then narrowing down by dividend yield, credit rating, callable date, and cumulative/non-cumulative features. Always review the issuing company's financials and the preferred stock's prospectus.
How to find the ticker symbol for preferred stock on E*TRADE?
Preferred stock ticker symbols often have a suffix like "-P", "PR", or "A" (e.g., "BAC-P" for Bank of America preferred stock). You can typically find these by searching the company's common stock symbol and looking for related preferred issues.
How to know if a preferred stock is callable on E*TRADE?
The callable date and price will be specified in the preferred stock's prospectus and often on the E*TRADE security detail page. Look for terms like "call date" or "redemption date."
How to distinguish between cumulative and non-cumulative preferred stock on E*TRADE?
This information is critical and will be stated in the preferred stock's prospectus. E*TRADE's research tools or detailed security information might also indicate this feature. Cumulative means missed dividends accrue, while non-cumulative means they are lost.
How to calculate the dividend yield of a preferred stock on E*TRADE?
The dividend yield is usually displayed on the preferred stock's quote page. It's calculated by dividing the annual dividend payment by the current market price of the preferred stock.
How to handle preferred stock dividends for tax purposes with E*TRADE?
E*TRADE will provide tax documents (e.g., Form 1099-DIV) detailing your dividend income. Preferred stock dividends are generally taxed as ordinary income, but some may qualify for the lower qualified dividend tax rates. Consult a tax advisor for personalized guidance.
How to sell preferred stock on E*TRADE?
Log in to your E*TRADE account, navigate to your portfolio, select the preferred stock you wish to sell, click "Trade" or "Sell," enter the quantity, choose your order type (limit order is recommended), and confirm.
How to set up alerts for preferred stock on E*TRADE?
On the security's quote page, look for an "Alerts" or "Set Alert" option. You can set up price alerts, volume alerts, or news alerts to stay informed about your preferred stock.
How to compare preferred stock with bonds on E*TRADE?
While both offer fixed income, preferred stocks are equity and carry more credit risk than investment-grade bonds. Bonds have a fixed maturity date and are higher in the capital structure during liquidation. Use E*TRADE's bond and preferred stock screeners side-by-side to compare yields, credit ratings, and other features.
How to get help with preferred stock trading on E*TRADE?
You can contact E*TRADE customer service by phone at 800-387-2331. They also offer online chat support and a comprehensive knowledge base with articles and FAQs on their website.
