Trading or Investing in Preferred Stocks

When trading or investing in preferred stocks, aside from the current yield of the security, there are a few things investors must consider. We will discuss two of them in this article, with more to cover later.

1) Liquidity

A lot of preferred stocks are very thinly traded, and some rarely get traded. For example, Pacific Enterprises Preferred Stock (PET-PD), last traded on Jul 30, 2010, and has not been traded since. Even preferred stocks from more well-known companies, e.g. Simon Property Group Series J Cumul Preferred Shares (SPG-PJ) can have volume for only a few hundred shares traded on a day.

Because of the liquidity issue, bid/ask spread can be very high, so one must always remember to put in limit order rather than market order, or else the filling price can be a big surprise.

For investors who are interested in preferred stocks but are concerned with liquidity, 10xreturn’s preferred stock center provides a list of the most active preferred stocks daily, and is a valuable guide for investors.

2) Discount/Premium

Most preferred stocks are callable, as issuers want to retire existing preferred stocks with newly issued ones so they can lower their capital cost when conditions are favorable. Premium or discount of a preferred stock depends on a few factors. Some of the factors are: a) perceived risk on the dividend payment of the security, or even risk on the survival of the issuing company; b) the convertible price to the corresponding common stocks for some convertible preferred stocks; c) intricate details of the preferred stocks usually only decipherable from the prospectus.

While premium/discount information is highly desirable, it is very difficult to find. More often than not, even representatives at some bond desks will ask investors to look up the information on their own. Fortunately, one can find such information when checking the quote a of preferred stock in For example, when one checks the quote of Morgan Stanley’s Series A preferred stock (NYSE: MS-PA), the premium/discount information is displayed along with the quote.

Part II of this article can be found here.


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