Common stock and preferred stock both represent ownership interests in a company, but they provide different rights, income characteristics, and risk profiles.
Common shareholders usually have voting rights and greater exposure to the company’s long-term growth. Preferred shareholders generally receive priority for dividend payments and a higher claim on company assets, but they often have limited voting rights and less capital appreciation potential.
The main tradeoff is growth versus income priority.
Common stock may be more suitable for investors seeking long-term appreciation. Preferred stock may appeal to investors seeking regular income and a position in the capital structure above common shareholders.
Neither type is automatically better. The appropriate choice depends on the investor’s goals, the terms of the security, and the financial strength of the issuing company.
What Is Common Stock?
Common stock is the standard form of equity ownership in a publicly traded company.
When investors buy common shares, they become partial owners of the business.
Common shareholders may receive:
- Voting rights
- Dividend payments
- Capital appreciation
- Participation in company growth
- A residual claim on company assets
Most stocks quoted in financial news and traded by individual investors are common stocks.
The value of common stock can rise significantly if the company grows, but it can also decline sharply if the business underperforms.
What Is Preferred Stock?
Preferred stock is a class of equity that usually has priority over common stock for dividends and liquidation proceeds.
Preferred shareholders are still owners rather than traditional lenders, but preferred shares often have characteristics similar to bonds.
Preferred stock may include:
- Fixed or stated dividend payments
- Dividend priority
- Higher liquidation priority than common stock
- Limited or no voting rights
- Callable features
- Convertible features
- Cumulative dividend provisions
The specific terms vary significantly between issues.
Investors should review the prospectus or offering documents rather than assuming all preferred shares work the same way.
Common Stock vs Preferred Stock at a Glance
| Feature | Common Stock | Preferred Stock |
|---|---|---|
| Ownership interest | Yes | Yes |
| Voting rights | Usually yes | Usually limited or none |
| Dividend priority | Lower | Higher |
| Dividend amount | Variable and not guaranteed | Often fixed or defined |
| Growth potential | Generally higher | Usually more limited |
| Price volatility | Usually higher | Often lower, but can still be significant |
| Liquidation priority | Lower | Higher than common stock |
| Maturity date | Usually none | Usually none, though terms vary |
| Call risk | Uncommon | Common in many issues |
| Convertibility | Sometimes | Available in some issues |
| Interest-rate sensitivity | Moderate | Often high |
| Main investor objective | Growth | Income and priority |
The Main Difference: Growth Rights vs Payment Priority
Common stock gives investors greater participation in a company’s future success.
Preferred stock gives investors stronger contractual or structural priority for certain payments.
Common Stock
Common shareholders may benefit substantially if:
- Revenue grows
- Earnings increase
- The company expands
- Valuation rises
- The company increases dividends
- The company repurchases shares
There is no fixed upper limit to the price of common stock.
Preferred Stock
Preferred shareholders generally receive a more defined income stream.
Their upside is often limited because preferred shares may trade around a stated value and may be called by the issuer.
Preferred stock may therefore behave more like an income security than a growth investment.
Voting Rights
Common Shareholders
Common shareholders usually have the right to vote on matters such as:
- Election of directors
- Major corporate transactions
- Mergers
- Certain compensation plans
- Shareholder proposals
- Governance matters
The number of votes usually depends on the number and class of shares owned.
Some companies issue multiple classes of common stock with different voting rights.
Preferred Shareholders
Preferred shareholders usually have limited or no regular voting rights.
They may receive voting rights under special circumstances, such as:
- Missed dividend payments
- Changes to the preferred stock’s terms
- Issuance of securities with higher priority
- Certain mergers or restructurings
The exact rights depend on the issue.
Dividend Differences
Dividend treatment is one of the most important distinctions.
Common Stock Dividends
Common dividends:
- Are not guaranteed
- May increase
- May decrease
- May be suspended
- Depend on board approval
- Often reflect company profitability and capital policy
A company may retain earnings instead of paying dividends.
Preferred Stock Dividends
Preferred dividends are often based on a stated rate or amount.
They may be:
- Fixed-rate
- Floating-rate
- Fixed-to-floating
- Cumulative
- Non-cumulative
- Participating
Preferred dividends generally must be paid before common dividends can be distributed.
However, preferred dividends are still not identical to bond interest and may be deferred or omitted depending on the terms and financial condition of the issuer.
What Is Cumulative Preferred Stock?
Cumulative preferred stock requires unpaid dividends to accumulate.
If the company skips a preferred dividend, the unpaid amount becomes dividends in arrears.
The company generally must pay those accumulated dividends before resuming common stock dividends.
Example
Assume a preferred share pays $5 annually.
The company skips payments for two years.
The accumulated unpaid dividends are:
$5 × 2 years = $10 per share
Before paying common shareholders, the company may need to pay the $10 arrears plus any current preferred dividend.
What Is Non-Cumulative Preferred Stock?
Non-cumulative preferred stock does not require skipped dividends to accumulate.
If the company does not declare a dividend for a period, the preferred shareholder may permanently lose that payment.
Non-cumulative preferred shares are common in certain financial institutions because of regulatory capital rules.
Investors should verify whether the preferred issue is cumulative or non-cumulative.
Which Has Greater Growth Potential?
Common stock generally has greater long-term growth potential.
If a company becomes much more profitable, common shareholders can benefit from:
- Higher earnings per share
- Increased dividends
- Higher valuation
- Share repurchases
- Business expansion
Preferred stock usually has more limited upside because:
- The dividend is often fixed
- The shares may be callable
- The price may remain anchored near par value
- Preferred holders do not participate fully in earnings growth
Some participating or convertible preferred shares can provide more upside, but their terms vary.
Which Has More Predictable Income?
Preferred stock usually provides more predictable income than common stock.
Preferred shares may appeal to investors who prioritize:
- Regular distributions
- Higher income than common shares
- Priority over common dividends
- Reduced dependence on company growth
However, preferred income is not guaranteed.
The issuer may defer or omit payments depending on:
- Security terms
- Financial stress
- Regulatory restrictions
- Board decisions
- Capital requirements
Investors should not treat preferred stock as equivalent to insured cash or guaranteed debt.
Which Is More Volatile?
Common stock is generally more sensitive to changes in company earnings and growth expectations.
Preferred stock is often more sensitive to:
- Interest rates
- Credit quality
- Yield spreads
- Call expectations
- Market liquidity
Preferred shares may be less volatile than common shares from the same issuer, but they can still fall sharply during:
- Credit crises
- Banking stress
- Rising interest-rate environments
- Issuer downgrades
- Liquidity shocks
Low volatility should not be assumed.
Liquidation Priority
If a company is liquidated, investors are paid according to the capital structure.
A simplified order may be:
- Secured creditors
- Senior debt holders
- Subordinated debt holders
- Preferred shareholders
- Common shareholders
Preferred shareholders rank above common shareholders but below bondholders and other creditors.
This means preferred stock has better liquidation priority than common stock, but it can still lose most or all of its value in bankruptcy.
Are Preferred Shares Safer Than Common Shares?
Preferred shares may be less risky in certain respects because they have:
- Dividend priority
- Higher liquidation priority
- More predictable income
- Lower exposure to common equity volatility
However, preferred stock carries important risks:
- Issuer credit risk
- Interest-rate risk
- Call risk
- Dividend suspension risk
- Liquidity risk
- Extension risk
- Inflation risk
- Subordination to debt
A weak preferred issuer may be riskier than the common stock of a financially strong company.
Security type alone does not determine safety.
What Is Callable Preferred Stock?
Many preferred shares are callable.
A call provision allows the issuer to redeem the shares at a specified price after a certain date.
Example
A preferred stock has:
Par value: $25
Call price: $25
Market price: $27
If the issuer calls the shares at $25, an investor who paid $27 may experience a capital loss, even after receiving dividends.
Issuers often call preferred shares when:
- Interest rates decline
- They can refinance more cheaply
- Regulatory treatment changes
- Capital structure needs change
Call risk can limit price appreciation.
What Is Convertible Preferred Stock?
Convertible preferred stock can be exchanged for common shares under defined terms.
Convertible preferred stock may offer:
- Preferred dividend income
- Higher payment priority
- Potential participation in common stock gains
However, it may also offer:
- A lower dividend than non-convertible preferred shares
- Complex conversion terms
- Dilution risk
- Greater sensitivity to the common stock price
Investors should review:
- Conversion ratio
- Conversion price
- Mandatory conversion terms
- Call provisions
- Anti-dilution adjustments
What Is Participating Preferred Stock?
Participating preferred stock may receive additional distributions beyond its standard dividend.
For example, participating preferred holders may receive:
- A fixed preferred dividend
- Additional dividends if common dividends exceed a threshold
- Additional proceeds in a sale or liquidation
Participating preferred stock is more common in private company financing than in ordinary public market investing.
What Is Fixed-to-Floating Preferred Stock?
A fixed-to-floating preferred share pays:
- A fixed dividend rate for an initial period
- A floating rate after a specified reset date
The floating rate may be based on a reference rate plus a spread.
These securities can reduce some long-term fixed-rate exposure, but they introduce:
- Reference-rate risk
- Reset risk
- Call risk
- Complexity
Many fixed-to-floating preferred shares are called before the floating period begins, though this is not guaranteed.
How Interest Rates Affect Preferred Stock
Preferred stock is often sensitive to interest rates because its dividend resembles fixed income.
When interest rates rise:
- Newly issued securities may offer higher yields
- Existing preferred shares may become less attractive
- Preferred stock prices may fall
When interest rates decline:
- Existing preferred dividends may become more attractive
- Preferred prices may rise
- Call risk may increase
Long-duration preferred shares can be especially sensitive to changing rates.
How Interest Rates Affect Common Stock
Interest rates also affect common stocks, but through different channels.
Higher rates may:
- Increase borrowing costs
- Reduce consumer demand
- Lower company valuations
- Make bonds more competitive
- Pressure growth stocks
Common stocks with strong earnings growth may eventually offset some interest-rate pressure, while fixed preferred dividends do not grow automatically.
Preferred Stock vs Bonds
Preferred stock and bonds share some characteristics, but they are not the same.
| Feature | Preferred Stock | Bonds |
|---|---|---|
| Legal status | Equity | Debt |
| Payment type | Dividend | Interest |
| Payment obligation | May be deferred or omitted | Contractual obligation |
| Priority | Below debt | Above preferred stock |
| Maturity | Often perpetual | Usually fixed maturity |
| Voting rights | Usually limited | None |
| Tax treatment | May receive dividend treatment | Usually interest income |
| Callability | Common | Common in some issues |
Preferred stock generally carries more risk than senior bonds from the same issuer.
Preferred Stock vs Dividend Stock
A dividend-paying common stock may look similar to preferred stock because both provide income.
However, the return profile differs.
Dividend Common Stock
Potential characteristics:
- Dividend growth
- Greater capital appreciation
- Voting rights
- Higher earnings sensitivity
- Lower dividend priority
Preferred Stock
Potential characteristics:
- Higher current yield
- Fixed or defined dividend
- Higher payment priority
- Lower growth potential
- Greater interest-rate sensitivity
Dividend stocks may suit investors seeking income growth, while preferred shares may suit investors seeking higher current income.
Tax Considerations
Tax treatment varies by country, account type, and security structure.
Potential differences include:
- Qualified dividend treatment
- Ordinary income treatment
- Corporate dividend deductions
- Foreign withholding
- Capital gains
- Return of capital
- Tax treatment of convertible securities
Some preferred dividends may qualify for favorable tax treatment, while others may not.
Investors should review official tax documents and consult a qualified tax professional when necessary.
Common Stock Classes
Some companies issue more than one class of common stock.
Different classes may have:
- Different voting rights
- Different conversion rights
- Different dividend rights
- Different transfer restrictions
For example, one class may provide one vote per share, while another provides ten votes per share.
The economic rights may be similar even when voting power differs.
Preferred Stock Classes
A company may issue several series of preferred stock.
Each series can have different:
- Dividend rates
- Call dates
- Conversion terms
- Priority
- Cumulative status
- Floating-rate provisions
- Redemption terms
Ticker symbols for preferred shares can vary by broker and market data provider.
Investors should confirm the exact series before trading.
Example: Common vs Preferred Return
Assume a company has:
Common Stock
Purchase price: $40
Annual dividend: $1
Price after one year: $48
Approximate total return before taxes and fees:
Capital gain: $8
Dividend: $1
Total gain: $9
Return: $9 ÷ $40 = 22.5%
Preferred Stock
Purchase price: $25
Annual dividend: $1.75
Price after one year: $25
Approximate total return:
Dividend: $1.75
Capital gain: $0
Return: $1.75 ÷ $25 = 7%
The common stock produced a higher return in this example, but it also carried greater downside risk.
Example: Company Financial Stress
Suppose a company experiences declining earnings.
The board may:
- Reduce or eliminate the common dividend.
- Suspend preferred dividends if necessary.
- Continue paying bond interest to avoid default.
This illustrates the priority structure:
Debt payments
↓
Preferred dividends
↓
Common dividends
Higher priority does not guarantee payment, but it improves the claim relative to lower-ranked securities.
When Common Stock May Be More Suitable
Common stock may be more suitable for investors who:
- Seek long-term capital growth
- Can tolerate volatility
- Want voting rights
- Believe in the company’s growth potential
- Have a long investment horizon
- Want exposure to rising earnings
- Do not require fixed income
Common stock remains exposed to significant company-specific risk.
When Preferred Stock May Be More Suitable
Preferred stock may be more suitable for investors who:
- Prioritize current income
- Want dividend priority
- Accept limited upside
- Understand interest-rate risk
- Can analyze issuer credit quality
- Understand call provisions
- Want equity exposure above common stock in the capital structure
Preferred shares can be complex and should not be purchased based only on yield.
Can Investors Own Both?
Yes.
An investor may hold common and preferred shares from the same company.
This creates exposure to the same issuer through two parts of the capital structure.
Potential advantages:
- Common stock growth exposure
- Preferred stock income
- Different risk characteristics
Potential disadvantages:
- Concentrated issuer risk
- Correlated losses during financial stress
- More complex monitoring
Owning both does not provide meaningful issuer diversification.
Preferred Stock ETFs
Investors can access preferred shares through ETFs.
Potential advantages:
- Diversification across issuers
- Easier trading
- Professional portfolio construction
- Lower single-issuer risk
Potential disadvantages:
- Expense ratio
- Interest-rate sensitivity
- Sector concentration
- Fund price volatility
- No fixed maturity
- Changing distributions
Many preferred stock funds have significant exposure to financial companies.
Investors should review sector concentration and fund structure.
How to Evaluate Preferred Stock
Before buying preferred shares, review:
- Issuer financial strength
- Credit ratings
- Dividend rate
- Current yield
- Yield to call
- Call date
- Call price
- Cumulative status
- Conversion terms
- Floating-rate provisions
- Liquidity
- Trading price relative to par
- Capital structure priority
- Tax treatment
- Prospectus terms
The highest stated yield may not provide the best risk-adjusted return.
How to Evaluate Common Stock
Before buying common shares, review:
- Business model
- Revenue growth
- Profitability
- Cash flow
- Debt
- Competitive advantages
- Management quality
- Industry outlook
- Valuation
- Dividend policy
- Share dilution
- Capital allocation
- Major risks
Common stock analysis focuses more heavily on the company’s future growth and valuation.
Common Mistakes With Preferred Stock
Chasing Yield
An unusually high yield may indicate financial distress or expected dividend cuts.
Ignoring Call Risk
A preferred share trading above its call price can produce a loss if redeemed.
Ignoring Interest-Rate Risk
Preferred prices can fall significantly when rates rise.
Assuming Dividends Are Guaranteed
Preferred dividends may be suspended or omitted.
Confusing Preferred Stock With Bonds
Preferred shareholders remain below creditors in the capital structure.
Ignoring Liquidity
Some preferred issues trade infrequently and have wide bid-ask spreads.
Common Mistakes With Common Stock
Buying Without Understanding the Business
Share price alone does not indicate investment quality.
Overconcentration
A single company can experience permanent decline.
Ignoring Valuation
A strong business can still be overpriced.
Relying Only on Dividends
A dividend can be cut and may not offset a falling share price.
Assuming Voting Rights Provide Control
Small shareholders usually have limited practical influence.
Key Takeaways
- Common stock and preferred stock are both forms of equity ownership.
- Common stock usually offers voting rights and greater growth potential.
- Preferred stock usually offers dividend priority and higher liquidation priority.
- Preferred dividends are often fixed or defined, but they are not guaranteed.
- Common shareholders rank below preferred shareholders and creditors in liquidation.
- Preferred stock is often sensitive to interest rates and call provisions.
- Common stock generally carries more earnings and valuation volatility.
- Investors should evaluate the specific security terms and issuer quality before investing.
Common Questions
Is preferred stock better than common stock?
Preferred stock may be better for investors seeking income and payment priority. Common stock may be better for investors seeking long-term growth and voting rights.
Is preferred stock safer than common stock?
Preferred stock ranks above common stock for dividends and liquidation proceeds, but it still carries issuer, interest-rate, call, and liquidity risks.
Can preferred stock lose value?
Yes. Preferred stock prices can decline because of rising interest rates, issuer credit concerns, dividend suspensions, or poor liquidity.
Do preferred shareholders have voting rights?
Usually not, although some preferred shares gain voting rights under special conditions.
Are preferred dividends guaranteed?
No. Preferred dividends have priority over common dividends but may still be deferred, suspended, or omitted depending on the terms.
Can common shareholders receive dividends before preferred shareholders?
Generally, declared preferred dividends must be paid before common dividends. The exact rules depend on the preferred issue.
Does preferred stock have a maturity date?
Many preferred shares are perpetual and have no maturity date. Some issues have mandatory redemption or other maturity-like provisions.
Why would a company issue preferred stock?
A company may use preferred stock to raise capital without adding traditional debt or significantly diluting common voting control.
Can preferred stock be converted into common stock?
Convertible preferred shares can be exchanged for common stock under specified terms. Not all preferred shares are convertible.
What happens to preferred stock if a company goes bankrupt?
Preferred shareholders are paid after creditors but before common shareholders. They may still receive little or nothing if the company lacks sufficient assets.