Convertible preferred shares of stock provide extra protection and benefits in comparison with common shares. Owners of preferred shares receive higher dividends than owners of common shares, although a company may defer payments if necessary. Investors with convertible stock have the option to convert their preferred stock into common stock at a highly desirable rate, too. For example, they might receive four shares of common stock for a share of preferred stock, says Charles H. Gibson in "Financial Reporting & Analysis."
1. Decide whether you feel comfortable enough to invest on your own, or whether you'd be better off investing through a broker. The world of preferred stocks can be confusing, so consider using a broker if you don't have a financial background. Also determine how much you wish to spend on your investment.
2. Look at stock reports to target promising companies and evaluate their financial ratios. Look at the percentages of sales growth rate, net income and dividends, noting whether the percentage of dividends increases or decreases over time. A decrease in dividends is a clear signal that you should not invest in that company. In addition to these three factors, which form a company's growth ratio, look at the interest coverage ratio, which compares operating income with interest earned. The number should be at least 3. Look at the debt equity ratio, too: A lower ratio means the stock is less likely to be affected by economic downturns.
3. Ask the ratio at which you can convert your preferred shares to common shares. The value of either type of stock may be expressed as "par value." Additionally, ask whether the company offers a buy-back option at a guaranteed rate, and if so what that rate is, Steven M. Bragg advises in "The Vest Pocket Controller." This offers a greater degree of security.
4. Select an online or in-person broker. If selecting an online broker, read their ratings at StockBrokers.com. Compare the offerings of online brokers, such as the fees and minimum deposit. If selecting an in-person broker, search for a full-service broker if you want investment advice, or a discount broker if you prefer to do your own research. Ask how much you will pay in fees to the broker, and compare brokers' ratings.
- Corporate Governance of Non-Listed Companies; Joseph A. McCahery and Erik P. M. Vermeulen
- The Globe and Mail: How to Buy Preferred Shares
- Financial Reporting & Analysis; Charles H. Gibson
- The Vest Pocket Controller; Steven M. Bragg
- Money Zine: Understanding Financial Ratios
- Money Zine: Times Interest Earned
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