When you buy a company’s stock, you’re essentially buying a small slice of ownership in that business. But not all stocks are created equal — there are two main types of shares you can own: preferred stock and common stock.
Both represent ownership, but they offer different rights, risks, and rewards. Knowing the difference helps you make smarter investment decisions that align with your goals — whether you want regular income or long-term growth.
Key Takeaways
-
Preferred shareholders receive dividends before common shareholders.
-
Preferred shares often have a fixed dividend rate and are less volatile than common stock.
-
Common shareholders usually have voting rights and greater growth potential.
-
In the event of bankruptcy or liquidation, preferred shareholders get paid before common shareholders.
-
Preferred stock behaves partly like a bond, offering predictable income but limited upside.
What Is Preferred Stock?
Preferred stock is a type of equity that blends features of both stocks and bonds. Like bonds, it provides a steady dividend income. Like stocks, it represents ownership in the company and can trade on public exchanges.
Preferred stockholders enjoy a more stable income stream — but usually don’t get voting rights.
Bond-Like Characteristics
Preferred shares have a par value, which is influenced by interest rate changes. When interest rates rise, the market value of preferred stock typically falls (and vice versa). This makes them somewhat sensitive to rate movements, though they’re generally less volatile than common stock.
Many preferred stocks are callable, meaning the company can repurchase them after a certain period — often at a premium price. For investors, this can result in the shares being “called away” when rates fall, limiting upside potential.
💡 Example: Suppose you buy preferred shares at $25, and the company calls them back later at $28. You earn a small premium — but you’ll need to reinvest the funds elsewhere.
Dividends on Preferred Stock
Preferred shareholders are first in line for dividends. Companies must pay any owed preferred dividends before paying common shareholders.
These dividends are often fixed and higher than those from common stock. They’re calculated as a percentage of the stock’s par value.
For example, a preferred share with a par value of $100 and a 6% dividend rate pays $6 per year, regardless of market fluctuations.
Missed Payments and Arrears
If a company skips a dividend payment, preferred shareholders may still be entitled to receive back payments later (called dividends in arrears) — depending on whether the stock is cumulative or non-cumulative.
Voting Rights and Control
Preferred stockholders typically do not have voting rights, meaning they can’t influence board elections or company policies.
By contrast, common stockholders usually get one vote per share, giving them a say in corporate governance decisions.
Pros and Cons of Preferred Stock
| Pros | Cons |
|---|---|
| Predictable fixed dividends | Usually no voting rights |
| Less volatile than common stock | Callable by the issuer |
| Priority in dividend and liquidation payouts | Price declines when interest rates rise |
| Suitable for income-focused investors | Limited growth potential |
🧠 Fun Fact: Some preferred shares, called perpetual preferreds, pay dividends indefinitely. Others, known as convertible preferreds, allow investors to swap them for common shares later — potentially benefiting from price growth.
What Is Common Stock?
Common stock represents ownership and voting rights in a corporation. It’s the most common form of equity investors buy, often offering greater potential for long-term growth — but also higher risk.
Voting Rights Explained
Common shareholders usually receive one vote per share, allowing them to elect board members and influence company policy. While individual votes rarely sway major corporations, collective investor sentiment can impact decision-making.
Growth and Market Performance
Unlike preferred stock, common shares can appreciate significantly in value. When a company performs well, its stock price tends to rise — creating opportunities for capital gains.
However, if the company struggles, common stock prices can drop sharply, making them more volatile.
Dividends on Common Stock
Dividends for common shareholders are not guaranteed. The board of directors decides whether to issue them — and how much.
If a company has already missed preferred stock dividends, common shareholders must wait until those payments are caught up before receiving any dividends.
Pros and Cons of Common Stock
| Pros | Cons |
|---|---|
| Potential for unlimited growth | High volatility |
| Voting rights | Last in line for payouts |
| High liquidity | Dividends not guaranteed |
💡 Historical Note: The first common stock ever issued was by the Dutch East India Company in 1602, marking the birth of modern stock investing.
Preferred vs. Common Stock: Key Differences
| Feature | Preferred Stock | Common Stock |
|---|---|---|
| Dividend Type | Fixed, predictable | Variable or none |
| Voting Rights | Usually none | Yes, typically one vote per share |
| Payment Priority | Paid before common | Paid after preferred |
| Growth Potential | Limited | Unlimited |
| Volatility | Lower | Higher |
| Liquidity | Often less liquid | Highly liquid |
| Similarity to Bonds | Yes | No |
Choosing Between Preferred and Common Stock
Your decision depends on your financial goals and risk tolerance:
-
If you want steady income and lower volatility → preferred stock fits best.
-
If you’re after long-term growth and can handle market swings → common stock might suit you better.
-
If you want influence in company decisions, choose common stock for its voting rights.
Bottom Line
Both preferred and common stock can play valuable roles in a diversified portfolio. Preferred shares offer stability and steady dividends, while common shares provide growth and ownership influence.
Understanding the trade-offs between income and growth helps investors pick the right balance for their financial goals.
➡️ Learn more about investing strategies, dividend income, and stock market basics at 1nvestopedia.com.
Frequently Asked Questions (FAQ)
1. Which is safer, preferred or common stock?
Preferred stock is generally safer because it offers fixed dividends and priority in liquidation. However, it has limited upside potential compared to common stock.
2. Why do companies issue preferred shares?
Companies issue preferred stock to raise capital without diluting voting power, offering investors a hybrid investment between debt and equity.
3. Can preferred stock be converted to common stock?
Yes. Convertible preferred stock allows shareholders to exchange their preferred shares for a set number of common shares.
4. Do preferred shareholders get dividends even if the company performs poorly?
Preferred dividends are fixed, but they can be suspended if the company faces financial trouble. Some preferreds are cumulative, meaning missed payments must be repaid later.
5. Which stock type has more growth potential?
Common stock typically has higher growth potential since its price fluctuates with company performance and market demand.
6. Can I lose money on preferred stock?
Yes. If interest rates rise or the issuing company faces financial distress, the value of preferred shares can decline.
7. Who should invest in preferred stock?
Preferred stock suits investors who prefer steady income, lower volatility, and less concern about voting rights or high growth.