Preferred stock is very similar to common stock in that they both offer dividends. The dividends from common stock will fluctuate from time to time. On the other hand, dividends from preferred shares are fixed and are usually larger than those from common stocks. Preferred payments are set when the shares are first issued. The price of preferred stock is calculated by using the dividend payment, par value and a required rate of return.
Obtain the original price at which the preferred stock was issued. This is called the par value and can be found in the stock's prospectus. The prospectus is located on the company website; if not, you can ask your broker to provide the information.
Obtain the preferred dividend. The dividend can be found in the prospectus or provided by your stock broker. The prospectus may present the preferred dividend as a percentage rate of the par value; this is called a dividend rate. If so, multiply the rate times the par value. This will equal the preferred dividend. For example, if the prospectus gives a dividend rate of 6 percent and a par value of $25, the preferred dividend would equal $1.50 (.06*25=$1.50).
Use an online calculator to determine the required rate of return. This is the minimum rate that investors need before they invest their money. Sites such as Moneychimp.com, Money-zine.com and Investment Analysis Calculator (see Resources), are easy to use and provide accurate calculations for the required rate of return.
Divide the preferred dividend by the required rate of return. The result is the preferred stock price. This price is the highest amount you should pay per share. If you pay any more than this, you will be overpaying.
- Investorguide.com: Common and Preferred Stock
- Office of Investor Education and Advocacy. "Stocks." Accessed Feb. 12, 2020.
- Charles Schwab. "Preferred Securities: Higher Yields, Different Risks." Accessed Feb. 12, 2020.
- Office of Investor Education and Advocacy. "Investor Bulletin: Interest Rate Risk—When Interest Rates Go Up, Prices of Fixed-Rate Bonds Fall." Accessed Feb. 12, 2020.
- Nasdaq. "Cumulative Preferred Stock Definition." Accessed Feb. 12, 2020.
- Nasdaq. "Dividend in Arrears Definition." Accessed Feb. 12, 2020.
- Nasdaq. "Noncumulative Preferred Stock Definition." Accessed Feb. 12, 2020.
- The Goldman Sachs Group, Inc. "1,500,000 Depositary Shares Each Representing 1/25th Interest in a Share of 5.00% Fixed-to-Floating Rate Non-Cumulative Preferred Stock, Series P," Page 112. Accessed Feb. 12, 2020.
- S&P Dow Jones Indices. "S&P U.S. Floating Rate Preferred Stock Index." Accessed Feb. 12, 2020.
- Office of Investor Education and Advocacy. "Convertible Securities." Accessed Feb. 12, 2020.
- Nasdaq. "Participating Preferred Stock Definition." Accessed Feb. 12, 2020.
Located in Massachusetts, Judith Alice has been writing finance and real estate articles since 2009. Her articles appear throughout the personal finance section of eHow. Alice has more than 11 years experience in real estate and holds a Bachelor of Science in finance from the University of Massachusetts.