How to Invest in Preferred Stock — A Complete Guide to Preferred Stock Investing (2026)

What Is Preferred Stock?

The basics every investor needs to understand.

Preferred stock is a class of ownership in a company that sits between common stock and bonds in the capital structure. If you think of a company's obligations as a stack, bondholders are at the top (they get paid first), preferred shareholders are in the middle, and common shareholders are at the bottom.

The key features of preferred stock are:

Par Value

A fixed face value, usually $25 or $50 per share. This is what the company owes you in a liquidation or redemption. When preferred stock trades below par, you are buying that claim at a discount.

Fixed Dividends

Preferred stock pays a stated dividend rate on its par value. A 7.75% preferred with $25 par pays $1.9375 per year. Dividends must be paid to preferred before any common dividends.

Liquidation Preference

If the company is wound down, preferred holders get paid their par value before common shareholders receive anything. This is the margin of safety that Graham and Dodd wrote about.

Preferred stock is often described as a hybrid security — it has the fixed income characteristics of a bond with the equity characteristics of stock. In practice, preferred shares trade more like bonds when things are calm and more like stocks when things get interesting.

Common vs Preferred vs Junior Preferred

How the three classes of equity stack up against each other.

Feature	Common Stock	Preferred Stock	Junior Preferred
Dividends	Variable, if declared	Fixed rate, paid before common	Fixed rate, paid after senior preferred
Voting Rights	Yes (typically 1 share = 1 vote)	Usually none	Usually none
Liquidation Priority	Last (after all debt and preferred)	After bonds, before common	After senior preferred, before common
Par Value	Nominal or none	Typically $25 or $50	Typically $25 or $50
Upside Potential	Unlimited	Capped near par (unless below par)	Significant if trading well below par
Risk Level	Highest equity risk	Moderate	Higher than senior preferred
GSE Example	FNMA, FMCC	Treasury's senior preferred (not publicly traded)	FNMAS, FMCKJ, FMCCS (OTC markets)

Types of Preferred Stock

Not all preferred stock is created equal. Know what you are buying.

Cumulative

Missed dividends accumulate and must be paid before any common dividends. The safest type for income investors.

Non-Cumulative

Missed dividends are gone forever. Higher risk, but often higher stated dividend rate. GSE junior preferred shares are non-cumulative.

Convertible

Can be converted into a specified number of common shares. Offers bond-like downside protection with equity upside potential.

Participating

Receives fixed dividends plus a share of additional profits. Rare in public markets, more common in venture capital term sheets.

Senior Preferred

First in line among preferred holders. The U.S. Treasury holds senior preferred stock in Fannie Mae and Freddie Mac with a liquidation preference that has been a central issue in the conservatorship.

Junior Preferred

Ranks below senior preferred but above common stock. Higher risk, higher potential reward. Glen Bradford's entire portfolio is GSE junior preferred.

How Preferred Stock Trades

OTC markets, tickers, and what to watch for.

Most preferred stocks — especially GSE junior preferred — trade on the OTC (over-the-counter) markets rather than major exchanges like NYSE or NASDAQ. This means:

Wider Spreads

The bid-ask spread on OTC preferred can be significant. Always use limit orders. Never place a market order on an OTC security unless you enjoy giving money away.

Five-Letter Tickers

OTC preferred typically have five-letter tickers. Fannie Mae preferred Series S is FNMAS. Freddie Mac preferred Series J is FMCKJ. The last letter usually identifies the series.

Multiple Series

A single company can have dozens of preferred series. Fannie Mae has Series O, P, Q, R, S, T and more. Freddie Mac has Series G through T. Each has different terms, dividend rates, and outstanding share counts.

Lower Liquidity

Some series trade thousands of shares daily, others trade hundreds. Check average daily volume before building a position. Accumulating a large position in a thinly traded series can take weeks.

Risk Factors

Every investment has risks. Preferred stock has specific ones you need to understand.

Interest Rate Risk

Preferred stock prices generally fall when interest rates rise, because the fixed dividend becomes less attractive relative to new higher-yielding alternatives.

Credit / Default Risk

If the issuer cannot pay dividends or goes bankrupt, preferred holders may lose their investment. Preferred is junior to all debt obligations.

Regulatory / Political Risk

For GSE preferred specifically, government action has been the dominant risk factor since 2008. FHFA, Treasury, and Congress all have the power to impact shareholder value.

Call Risk

Many preferred shares are callable — the issuer can redeem them at par. If you bought below par, this is a win. If you bought above par, you take a loss.

Liquidity Risk

Thin OTC volume means you may not be able to exit a position quickly at a fair price, especially during market stress.

Dividend Suspension Risk

Companies can suspend preferred dividends (and have — Fannie/Freddie preferred dividends have been suspended since 2008). For non-cumulative preferred, suspended dividends are not owed.

The GSE Preferred Story

Why one investor bet everything on Fannie Mae and Freddie Mac junior preferred stock.

Fannie Mae and Freddie Mac are the two largest financial institutions in America. They guarantee roughly half of all U.S. home mortgages — over $7 trillion in assets combined. They have been in government conservatorship since September 2008.

In 2012, the Treasury Department imposed the Net Worth Sweep (the Third Amendment to the Preferred Stock Purchase Agreements), which redirected 100% of Fannie and Freddie's profits to the U.S. Treasury — indefinitely. Dividends to preferred and common shareholders were eliminated. The companies have since sent over $300 billion to Treasury.

I hold 26 series of junior preferred stock across both Fannie Mae and Freddie Mac. These shares have par values of $25 and $50. They have been trading at steep discounts to par since the conservatorship began. My thesis is straightforward: if the GSEs exit conservatorship with the capital structure intact, preferred shareholders get paid par value or close to it, plus the resumption of dividends.

I have written eight books and over 300 articles documenting the conservatorship, the legal battles, the Net Worth Sweep, and the path to recapitalization. My track record is fully documented and publicly available.

The Bull Case for GSE Preferred in 2026

What has to go right — and what is already going right.

Recapitalization Momentum

Both Fannie Mae and Freddie Mac have been rebuilding capital under retained earnings agreements. The pathway to exit from conservatorship has never been clearer.

Massive Earnings Power

Combined, the GSEs generate tens of billions in annual net income. These are not distressed companies — they are enormously profitable enterprises operating under government control.

Discount to Par Value

Junior preferred shares trade at significant discounts to their stated par values. If the capital structure is respected upon exit, the upside is substantial.

Dividend Resumption

Once the GSEs exit conservatorship and begin paying dividends again, preferred shareholders would receive their stated dividend rates on par value — high single-digit yields at current market prices.

Legal Precedent

Multiple court cases have established that shareholders have standing and that the Net Worth Sweep raised serious legal questions about government overreach.

Political Alignment

Key political figures have expressed support for ending the conservatorship and recapitalizing the GSEs. The political will to resolve this is building.

Frequently Asked Questions

Common questions about preferred stock investing.

What is preferred stock?

Preferred stock is a class of equity that sits between common stock and bonds in a company's capital structure. Preferred shareholders receive dividends before common shareholders and have a higher claim on assets in liquidation. Most preferred shares have a fixed par value (typically $25 or $50) and pay a fixed dividend rate.

What is the difference between preferred stock and common stock?

Common stock gives you voting rights and unlimited upside but you are last in line for dividends and assets. Preferred stock typically has no voting rights but offers fixed dividends, priority over common in liquidation, and a defined par value. Preferred stock trades more like a bond in normal times but can have equity-like upside when trading below par.

What is junior preferred stock?

Junior preferred stock ranks below senior preferred but above common stock in the capital structure. In a liquidation, senior preferred gets paid first, then junior preferred, then common shareholders. Junior preferred typically offers higher dividend rates to compensate for the additional risk. Fannie Mae and Freddie Mac each have multiple series of junior preferred stock trading on OTC markets.

How do you buy preferred stock?

Most preferred stocks trade on OTC (over-the-counter) markets. You can buy them through any major brokerage account just like common stock. Look up the specific ticker symbol (for example, FNMAS for Fannie Mae preferred Series S, or FMCKJ for Freddie Mac preferred Series J) and place a limit order. OTC stocks can have wider bid-ask spreads, so limit orders are strongly recommended over market orders.

What does par value mean for preferred stock?

Par value is the face value of a preferred share, typically $25 or $50. It determines the dividend payment (for example, a 7.75% preferred with $25 par value pays $1.9375 per year in dividends). In a liquidation or redemption, shareholders receive par value. When preferred stock trades below par, it represents a potential discount to intrinsic value.

What is cumulative preferred stock?

Cumulative preferred stock accumulates any unpaid dividends. If the company suspends dividends, all missed payments must be paid before any dividends can be paid to common shareholders. Non-cumulative preferred stock does not accumulate missed payments. Fannie Mae and Freddie Mac junior preferred shares are non-cumulative, meaning dividends suspended during conservatorship do not accrue.

Why are Fannie Mae and Freddie Mac preferred shares trading below par value?

Fannie Mae and Freddie Mac have been in government conservatorship since 2008. The Net Worth Sweep (Third Amendment, 2012) directed all profits to the U.S. Treasury, suspending dividends to preferred and common shareholders. Preferred shares trade below par because of uncertainty around recapitalization, exit from conservatorship, and whether shareholders will be made whole. If the GSEs exit conservatorship with the capital structure intact, preferred shares could return to par value, representing significant upside from current prices.

What are the risks of investing in preferred stock?

Key risks include: interest rate risk (preferred prices fall when rates rise), credit risk (the issuer may not be able to pay dividends or par value), liquidity risk (OTC-traded preferred can have thin volume), call risk (the issuer may redeem shares at par before you realize full gains), and regulatory risk (especially relevant for GSE preferred, where government action can impact value). Always understand the specific terms of the preferred series you are buying.

Keep Exploring

Must Read

Preferred StockInvesting