Common Stock vs Preferred Stock: Key Differences Explained

Common stock and preferred stock are two forms of equity ownership, but they offer different rights, risks, and return profiles.

Common stock usually provides:

• Voting rights
• Greater long-term growth potential
• Variable dividends
• Lower payment priority

Preferred stock usually provides:

• Higher dividend priority
• Higher liquidation priority
• More predictable income
• Limited or no voting rights
• Greater sensitivity to interest rates

The simplest comparison is:

Neither type is automatically better.

Common stock may be more suitable for investors seeking long-term appreciation and participation in business growth.

Preferred stock may be more suitable for investors seeking income and a higher claim than common shareholders, while accepting limited upside and additional structural risks.

What Is Common Stock?

Common stock is the standard form of ownership in a public company.

When investors refer to a company’s stock, they usually mean common stock.

Common shareholders may receive:

• Voting rights
• Dividend payments
• Capital appreciation
• Residual ownership
• Access to shareholder meetings
• Rights under corporate governance rules

The value of common stock depends heavily on the company’s future revenue, profit, cash flow, competitive position, and market valuation.

If the company grows successfully, common shareholders may benefit substantially.

If the company fails, common shareholders are usually last in line to recover value.

What Is Preferred Stock?

Preferred stock is a class of equity that generally has priority over common stock for dividends and liquidation proceeds.

Preferred shares often behave partly like stocks and partly like bonds.

They are equity because:

• They represent an ownership interest.
• Their dividends may be discretionary.
• They often have no fixed maturity date.
• They rank below debt.

They resemble bonds because:

• Dividends may be fixed.
• Income may be more predictable.
• Prices may react strongly to interest rates.
• Upside may be limited.
• Some issues are callable.

Preferred stock terms vary significantly, so investors must review the specific security.

Common Stock vs Preferred Stock in Simple Terms

Imagine a company has both common and preferred shareholders.

The company earns money and decides to pay dividends.

Preferred shareholders are generally paid first.

If enough cash remains, common shareholders may receive a dividend.

If the company is liquidated, preferred shareholders generally have a higher claim than common shareholders.

However, common shareholders usually have more voting power and more upside if the company becomes much more valuable.

Is Preferred Stock Really Stock?

Yes.

Preferred stock is part of the company’s equity capital.

However, it occupies a middle position in the capital structure:

Debt
↓
Preferred Stock
↓
Common Stock

Debt holders generally have the highest payment priority.

Preferred shareholders rank below creditors but above common shareholders.

This middle position explains why preferred stock combines characteristics of debt and equity.

What Are the Main Differences Between Common and Preferred Stock?

The most important differences involve:

• Voting rights
• Dividend priority
• Dividend structure
• Capital appreciation
• Liquidation priority
• Interest-rate sensitivity
• Call provisions
• Conversion features
• Risk
• Investor objective

Common Stock vs Preferred Stock: Voting Rights

Common shareholders usually have voting rights.

They may vote on:

• Election of directors
• Mergers
• Governance changes
• Shareholder proposals
• Equity compensation plans
• Certain corporate actions

Voting power usually depends on:

• Number of shares owned
• Share class
• Company charter
• Applicable law

Preferred shareholders usually have limited or no voting rights.

However, some preferred issues gain voting rights if:

• Dividends are missed
• The company changes preferred terms
• A merger affects the class
• A protective provision is triggered

Why Common Shareholders Usually Have More Voting Power

Common stock represents the residual ownership of the business.

Common shareholders absorb more business risk and receive whatever value remains after higher-priority claims are satisfied.

Because of this residual role, they usually have greater governance rights.

Preferred investors accept less control in exchange for higher income priority.

Common Stock vs Preferred Stock: Dividends

Dividend treatment is one of the clearest differences.

Common Stock Dividends

Common dividends are usually:

• Variable
• Discretionary
• Based on company policy
• Paid after preferred dividends
• Linked to profit and cash flow

A company may:

• Increase the common dividend
• Keep it unchanged
• Reduce it
• Suspend it
• Eliminate it

Common dividends are not guaranteed.

Preferred Stock Dividends

Preferred dividends are often:

• Fixed
• Formula-based
• Paid before common dividends
• Higher than common dividend yields
• Scheduled quarterly or semiannually

Example:

Preferred share par value: $25
Dividend rate: 6%
Annual dividend: $1.50

The dividend calculation is:

$25 × 6% = $1.50

If the preferred share trades at $20, its current yield becomes:

$1.50 ÷ $20 = 7.5%

The stated dividend rate remains based on par value, while the market yield changes with price.

What Is Dividend Priority?

Dividend priority means preferred shareholders must generally receive the required dividend before the company can pay common dividends.

This does not mean preferred dividends are guaranteed.

A company may suspend preferred dividends if allowed by the security terms and applicable law.

The consequences depend on whether the preferred stock is cumulative or non-cumulative.

Cumulative Preferred Stock

Cumulative preferred stock accumulates unpaid dividends.

If the company misses a preferred dividend, the unpaid amount becomes dividends in arrears.

The company generally must pay those arrears before resuming common dividends.

Cumulative Dividend Example

Assume:

Annual preferred dividend: $2 per share
Missed payments: 2 years
Shares owned: 100

Accumulated unpaid dividends:

$2 × 2 × 100 = $400

The company generally must pay the $400 arrears before paying common dividends.

Non-Cumulative Preferred Stock

Non-cumulative preferred stock does not accumulate missed dividends.

If the board skips a payment, the investor may permanently lose that dividend.

This structure is common in some financial institutions because regulators may want issuers to preserve capital without creating a growing dividend liability.

Participating Preferred Stock

Participating preferred stock may receive:

• Its regular preferred dividend
• Additional distributions linked to common dividends or company performance

This feature provides more upside than traditional fixed preferred stock.

It is less common in ordinary public-market preferred shares.

Adjustable-Rate Preferred Stock

Adjustable-rate preferred stock has a dividend that changes according to a benchmark or formula.

The dividend may be linked to:

• Short-term interest rates
• Government bond yields
• A reference rate
• A stated spread

This can reduce some interest-rate risk compared with fixed-rate preferred stock, but payments may decline when benchmark rates fall.

Fixed-to-Floating Preferred Stock

A fixed-to-floating preferred share pays:

• A fixed dividend during an initial period
• A floating dividend after a reset date

Example:

Initial dividend: 6% until 2030
After 2030: reference rate + 3%

Investors must understand:

• Reset date
• Reference rate
• Spread
• Call date
• Minimum or maximum rate
• Replacement benchmark provisions

Common Stock vs Preferred Stock: Growth Potential

Common stock generally has greater long-term appreciation potential.

If a company’s earnings grow significantly, common shares may rise many times in value.

Preferred shares usually have more limited upside because investors value them mainly for:

• Dividend income
• Credit quality
• Interest-rate environment
• Call features

Common Stock Growth Example

Suppose a company’s common stock rises from:

$20 to $80

The capital gain is:

300%

If the business performs exceptionally well, there is no fixed upper limit on the stock price.

Preferred Stock Upside Example

Suppose a preferred share has:

Par value: $25
Market price: $20

If conditions improve, it may rise toward $25.

However, if the issuer can call the shares at $25, the call price can limit upside.

A preferred share trading above its call value may face capital-loss risk if it is redeemed.

Common Stock vs Preferred Stock: Liquidation Priority

Liquidation priority determines who is paid first if a company is wound down or goes bankrupt.

A simplified order is:

1. Secured creditors
2. Senior debt holders
3. Subordinated debt holders
4. Preferred shareholders
5. Common shareholders

Preferred shareholders rank ahead of common shareholders but behind creditors.

What Is Liquidation Preference?

Liquidation preference is the amount preferred shareholders are entitled to receive before common shareholders during liquidation.

It may be based on:

• Par value
• Stated liquidation value
• Unpaid cumulative dividends
• Terms in the preferred prospectus

Example:

Liquidation preference: $25 per share
Preferred shares owned: 100
Potential claim: $2,500

Recovery is not guaranteed.

If assets are insufficient, preferred shareholders may receive less than the stated preference or nothing.

Why Common Shareholders Are Last

Common shareholders are residual owners.

They receive whatever remains after:

• Employee claims
• Taxes
• Secured debt
• Unsecured debt
• Preferred claims
• Other obligations

This lower priority contributes to the greater risk and higher potential return of common stock.

Common Stock vs Preferred Stock: Price Volatility

Common stock prices are primarily influenced by:

• Earnings growth
• Revenue
• Cash flow
• Business risk
• Valuation
• Market sentiment

Preferred stock prices are often influenced by:

• Interest rates
• Credit quality
• Dividend safety
• Call provisions
• Market liquidity
• Issuer-specific risk

Common stocks may be more volatile because of business expectations.

Preferred shares may be less volatile in normal conditions but can still decline sharply during financial stress.

Interest-Rate Risk in Preferred Stock

Fixed-rate preferred shares often behave like long-duration bonds.

When market interest rates rise, existing preferred shares may become less attractive.

Suppose a preferred stock pays:

$1.50 annually on a $25 par value

The stated rate is:

6%

If new preferred securities offer 8%, investors may require the older share’s market price to fall.

At a $18.75 price:

$1.50 ÷ $18.75 = 8%

This illustrates why preferred prices can fall when rates rise.

Do Common Stocks Have Interest-Rate Risk?

Yes, but the mechanism differs.

Higher rates can:

• Increase company borrowing costs
• Reduce economic demand
• Lower valuations
• Make bonds more attractive
• Pressure future earnings

Growth stocks may be especially rate-sensitive because much of their value depends on future cash flows.

Common Stock vs Preferred Stock: Maturity

Common stock generally has no maturity date.

Investors can hold shares as long as the company remains public.

Traditional preferred stock also often has no maturity date.

This makes many preferred shares perpetual.

However, preferred securities may have:

• Call dates
• Conversion dates
• Reset dates
• Mandatory redemption dates
• Sinking fund provisions

The specific prospectus controls.

What Is Callable Preferred Stock?

Callable preferred stock allows the issuer to redeem the shares at a stated price after a specified date.

Example:

Call price: $25
First call date: June 1, 2030

After the call date, the company may redeem the shares for $25 each.

Why Do Companies Call Preferred Stock?

An issuer may call preferred stock when:

• Market interest rates fall
• It can refinance at a lower dividend rate
• Capital rules change
• The security becomes expensive
• Management wants to simplify the capital structure

Call Risk Example

Suppose an investor buys preferred stock at:

$27

The issuer later calls it at:

$25

Capital loss:

$2 per share

The investor may receive dividends before redemption, but the call price limits upside.

Yield to Call

Yield to call estimates the return if the preferred stock is redeemed on the call date.

It considers:

• Purchase price
• Dividend payments
• Call price
• Time until call

Investors should compare:

• Current yield
• Yield to call
• Yield to worst

A high current yield can be misleading if the security is likely to be called at a lower price.

What Is Convertible Preferred Stock?

Convertible preferred stock can be exchanged for common shares under stated terms.

The conversion may be:

• Optional for the investor
• Mandatory
• Triggered by specific events

Convertible preferred stock offers:

• Preferred dividend income
• Higher priority
• Potential common-stock upside

Conversion Ratio Example

Assume one preferred share converts into:

2 common shares

If common stock trades at:

$15

The conversion value is:

2 × $15 = $30

If the preferred share trades at $27, conversion may appear attractive, subject to terms and taxes.

What Is Mandatory Convertible Preferred Stock?

Mandatory convertible preferred stock automatically converts into common shares on a future date.

The number of shares may depend on the common stock price.

Investors receive income before conversion but eventually become common shareholders.

Risks include:

• Common-stock decline
• Forced conversion
• Limited upside
• Complex payout formulas

What Is Perpetual Preferred Stock?

Perpetual preferred stock has no fixed maturity date.

The issuer may continue paying dividends indefinitely unless it calls or restructures the security.

Perpetual preferreds can be highly sensitive to:

• Interest rates
• Credit spreads
• Inflation
• Call expectations

Trust Preferred Securities and Hybrid Securities

Some securities are marketed similarly to preferred stock but may have different legal structures.

Examples may include:

• Trust preferred securities
• Junior subordinated notes
• Capital securities
• Depositary shares
• Hybrid bonds

Investors should not rely only on the security name.

They should review:

• Legal issuer
• Ranking
• Payment deferral rules
• Maturity
• Tax treatment
• Call terms

What Are Depositary Preferred Shares?

Some preferred stocks trade as depositary shares.

A depositary share may represent a fraction of an underlying preferred share.

Example:

One depositary share = 1/40 of one preferred share

This allows the security to trade at a more accessible price.

The depositary receipt terms explain the investor’s rights.

Common Stock vs Preferred Stock: Credit Risk

Preferred dividends depend on the issuer’s financial condition.

Preferred investors should analyze:

• Revenue stability
• Profitability
• Free cash flow
• Debt
• Interest coverage
• Regulatory capital
• Credit ratings
• Dividend coverage
• Economic sensitivity

A high preferred yield may signal:

• Higher default risk
• Dividend suspension risk
• Call uncertainty
• Low liquidity
• Industry stress

Preferred Stock and Financial Institutions

Banks and insurance companies are major preferred-stock issuers.

They may use preferred equity to support regulatory capital.

Investors should review:

• Capital ratios
• Credit losses
• Loan quality
• Liquidity
• Regulatory restrictions
• Profitability
• Stress-test results

Regulators may restrict distributions during periods of financial stress.

Preferred Dividend Coverage

Preferred dividend coverage measures the company’s ability to pay preferred dividends.

A simple version is:

Preferred Dividend Coverage =
Earnings Available for Fixed Charges
÷ Preferred Dividend Requirement

Definitions vary.

Investors may also compare:

• Free cash flow
• Interest expense
• Preferred dividends
• Common dividends
• Total fixed obligations

Common Dividend Coverage

Common dividends are usually evaluated using:

Payout Ratio =
Dividend Per Share
÷ Earnings Per Share

and:

FCF Payout Ratio =
Common Dividends
÷ Free Cash Flow

Common dividends have lower priority and are often cut before preferred payments.

Can a Company Pay Preferred Dividends but Not Common Dividends?

Yes.

A company may suspend common dividends while continuing preferred dividends.

This can happen because preferred payments have higher priority.

For cumulative preferred stock, the company may need to remain current on preferred dividends before resuming common distributions.

Can a Company Skip Preferred Dividends?

Yes.

Preferred dividends are generally not the same as bond interest.

The issuer may be able to defer or skip dividends depending on:

• Security terms
• Corporate law
• Regulatory rules
• Board decisions
• Financial condition

Consequences may include:

• Dividend accumulation
• Voting rights for preferred holders
• Restrictions on common dividends
• Market-price declines

Preferred Stock vs Bonds

Preferred stock and bonds both may provide income, but they are different.

Bonds generally have stronger contractual protection.

Preferred stock may offer higher income to compensate for lower priority.

Preferred Stock vs Common Stock vs Bonds

Common Stock vs Preferred Stock: Tax Treatment

Tax treatment depends on:

• Country
• Account type
• Issuer
• Security structure
• Holding period
• Dividend classification

Preferred dividends may receive the same treatment as qualified common dividends in some cases.

Other preferred payments may be taxed as ordinary income.

Investors should verify the security’s tax documentation.

Qualified Dividend Income

Some common and preferred dividends may qualify for favorable tax treatment if:

• The issuer qualifies
• The investor meets holding-period rules
• The security is eligible
• The account is taxable

Not every preferred security produces qualified dividend income.

Corporate Investors and Dividends Received Deduction

In some jurisdictions, corporate investors may receive tax benefits for eligible dividends from other corporations.

This can increase institutional demand for certain preferred shares.

Rules are complex and can change.

Common Stock vs Preferred Stock: Liquidity

Large common stocks often trade with:

• High volume
• Narrow bid-ask spreads
• Broad analyst coverage
• Many market participants

Preferred shares may have:

• Lower trading volume
• Wider spreads
• Fewer buyers and sellers
• Complex ticker symbols
• Limited analyst coverage

Lower liquidity can increase execution costs.

Preferred Stock Ticker Symbols

Preferred ticker formats vary by broker and exchange.

The same security may appear as:

• ABC.PA
• ABC-PA
• ABC PR A
• ABCpA

Investors should confirm:

• Issuer
• Series
• Coupon
• Par value
• Call date
• CUSIP or identifier
• Exchange

Buying the wrong preferred series can produce a very different risk profile.

Common Stock vs Preferred Stock: Market Price Behavior

Common stock prices usually respond more to changes in:

• Earnings expectations
• Revenue growth
• New products
• Competitive position
• Valuation

Preferred stock prices usually respond more to:

• Interest rates
• Credit spreads
• Dividend safety
• Call probability
• Liquidity
• Regulatory capital changes

Preferred Stock Price Example

Assume a preferred share has:

Par value: $25
Annual dividend: $1.50

At different prices:

A higher yield may reflect a lower price and higher perceived risk.

Why Does Preferred Stock Trade Above Par?

Preferred stock may trade above par because:

• Its dividend is attractive
• Market rates have fallen
• Credit quality improved
• Investors expect continued payments

However, buying above par creates call risk.

Why Does Preferred Stock Trade Below Par?

It may trade below par because:

• Interest rates increased
• Credit quality weakened
• Dividend risk increased
• The security is illiquid
• The issuer is unlikely to call it
• Sector conditions deteriorated

A discount does not automatically mean undervaluation.

Common Stock Valuation

Common stock valuation may use:

• P/E ratio
• PEG ratio
• Price-to-sales
• EV/EBITDA
• Free cash flow yield
• Dividend discount models
• Discounted cash flow

The goal is to estimate the value of future business cash flows.

Preferred Stock Valuation

Preferred stock valuation often focuses on:

• Current yield
• Yield to call
• Yield to worst
• Credit quality
• Call price
• Interest-rate sensitivity
• Dividend coverage
• Reset terms
• Liquidity

A simplified perpetual preferred valuation is:

Preferred Value =
Annual Dividend
÷ Required Return

Example:

Annual dividend: $1.50
Required return: 6%
Estimated value: $25

If the required return rises to 8%:

$1.50 ÷ 8% = $18.75

This illustrates preferred stock’s sensitivity to required yields.

Common Stock vs Preferred Stock: Inflation Risk

Preferred dividends are often fixed.

Inflation reduces the purchasing power of those payments.

Common stock may offer better long-term inflation protection if the company can:

• Raise prices
• Grow earnings
• Increase dividends
• Expand cash flow

However, inflation can also hurt common stocks through higher costs and interest rates.

Common Stock vs Preferred Stock: Reinvestment Risk

Preferred investors face reinvestment risk if:

• The shares are called
• Dividend rates reset lower
• The issuer redeems high-yield securities

The investor may have to reinvest at a lower return.

Common shareholders face a different risk: the company may reinvest retained earnings poorly.

Common Stock vs Preferred Stock: Total Return

Common Stock Total Return

Total Return =
Price Change
+ Dividends

Common returns may be driven heavily by capital appreciation.

Preferred Stock Total Return

Total Return =
Preferred Dividends
+ Price Change
+ Redemption Effect

Preferred returns may be driven more by income.

A high current yield does not guarantee a high total return if the price declines or the security is called below the purchase price.

Common Stock Return Example

Assume:

Purchase price: $40
Sale price: $50
Dividends received: $2

Total return:

($10 + $2) ÷ $40 = 30%

Preferred Stock Return Example

Assume:

Purchase price: $24
Sale or redemption price: $25
Dividends received: $1.50

Total return:

($1 + $1.50) ÷ $24 = 10.42%

The return depends on timing and whether the issuer pays as expected.

When Common Stock May Be More Suitable

Common stock may be more suitable for investors seeking:

• Long-term capital growth
• Voting rights
• Participation in business expansion
• Rising dividends
• Higher return potential
• Inflation protection through business growth

The investor must accept:

• Higher volatility
• Lower payment priority
• Greater business risk
• Possible permanent loss

When Preferred Stock May Be More Suitable

Preferred stock may be more suitable for investors seeking:

• Higher current income
• Priority over common shareholders
• Lower dependence on company growth
• Portfolio diversification
• More predictable distributions

The investor must accept:

• Limited upside
• Interest-rate risk
• Call risk
• Credit risk
• Lower liquidity
• Possible dividend suspension

Can Preferred Stock Replace Bonds?

Preferred stock may complement bonds, but it is not a direct substitute.

Preferred shares generally have:

• Lower priority than bonds
• More payment uncertainty
• No fixed maturity
• Greater equity-market sensitivity

Investors should not treat preferred dividends as equivalent to guaranteed bond interest.

Can Preferred Stock Replace Dividend Stocks?

Preferred stock may provide more predictable income than common dividend stocks.

However, common dividend stocks may offer:

• Dividend growth
• Capital appreciation
• Voting rights
• Better inflation protection

The two can serve different portfolio roles.

Preferred Stock ETFs

Preferred stock ETFs hold portfolios of preferred securities.

Advantages may include:

• Diversification
• Easier trading
• Professional management
• Access to many issuers

Risks include:

• Expense ratios
• Interest-rate sensitivity
• Financial-sector concentration
• No individual maturity
• Changing distributions
• Fund-level price volatility

Individual Preferred Shares vs Preferred ETFs

How to Research Preferred Stock

Review the prospectus or offering document.

Key terms include:

• Par value
• Dividend rate
• Current yield
• Cumulative status
• Call date
• Call price
• Conversion terms
• Reset formula
• Liquidation preference
• Seniority
• Voting rights
• Tax treatment
• Dividend deferral rules

Do not rely only on a broker’s summary.

How to Research Common Stock

Review:

• Business model
• Revenue growth
• Profit margins
• EPS
• Free cash flow
• Debt
• Competitive advantages
• Management
• Valuation
• Dilution
• Industry risk

Common stock analysis is more focused on future business value.

Common Stock vs Preferred Stock During a Recession

During a recession:

Common Stock

May decline because of:

• Lower revenue
• Lower earnings
• Dividend cuts
• Valuation compression

Preferred Stock

May decline because of:

• Credit concerns
• Dividend suspension risk
• Wider credit spreads
• Liquidity stress

Preferred stock may be less exposed to growth expectations but still vulnerable to financial distress.

Common Stock vs Preferred Stock During Rising Rates

Common Stock

May face:

• Lower valuations
• Higher borrowing costs
• Slower demand

Preferred Stock

Fixed-rate preferred shares may face direct yield competition from newly issued securities.

They can decline substantially if rates rise.

Common Stock vs Preferred Stock During Falling Rates

Falling rates may support preferred prices because their fixed dividends become more attractive.

However, falling rates can also increase call risk.

Common stocks may benefit from lower financing costs and higher valuations, but a recession-driven rate cut can still accompany weak equity performance.

Common Stock vs Preferred Stock During Inflation

Common stock may have better long-term inflation protection if companies can raise prices and grow earnings.

Fixed preferred dividends may lose purchasing power.

Floating-rate preferreds may adjust, depending on the formula.

Risks of Common Stock

Common stock risks include:

• Business failure
• Earnings volatility
• Market volatility
• Dividend cuts
• Dilution
• Valuation compression
• Low liquidation priority
• Management failure
• Competition
• Regulation

Risks of Preferred Stock

Preferred stock risks include:

• Interest-rate risk
• Credit risk
• Dividend suspension
• Call risk
• Reinvestment risk
• Inflation risk
• Liquidity risk
• Conversion risk
• Regulatory risk
• Complex terms

Common Mistakes With Common Stock

Buying Because the Share Price Is Low

Share price alone does not measure valuation.

Ignoring Dilution

New shares can reduce per-share value.

Focusing Only on Revenue Growth

Profitability and cash flow matter.

Overpaying for a Good Business

Valuation affects future returns.

Ignoring Balance Sheet Risk

High debt increases downside risk.

Common Mistakes With Preferred Stock

Looking Only at Current Yield

A high yield may signal high risk.

Ignoring the Call Date

Buying above call price can create a loss.

Assuming Dividends Are Guaranteed

Preferred dividends may be suspended.

Ignoring Cumulative Status

Missed non-cumulative dividends may never be recovered.

Confusing Par Value With Market Value

A $25 par value does not guarantee redemption or market price.

Ignoring Interest-Rate Risk

Perpetual fixed-rate preferreds can decline sharply when rates rise.

Buying the Wrong Series

Different preferred series from the same issuer may have very different terms.

Common Stock vs Preferred Stock Example

Assume a company issues:

Common Stock

Market price: $50
Annual dividend: $1
Dividend yield: 2%

Preferred Stock

Market price: $25
Annual dividend: $1.50
Current yield: 6%

If the company grows rapidly:

• Common stock may rise significantly.
• Preferred stock may remain near $25.

If the company experiences moderate weakness:

• Common dividends may be cut first.
• Preferred dividends may continue.

If the company enters bankruptcy:

• Bondholders are paid first.
• Preferred holders rank ahead of common shareholders.
• Both groups may still lose money.

Common Stock vs Preferred Stock Decision Checklist

Investment Objective

• Do you want growth or income?
• Are voting rights important?
• Is capital appreciation the main goal?

Dividend Analysis

• Is the preferred dividend cumulative?
• Is the dividend fixed or floating?
• Can the issuer suspend payments?
• Is the common dividend growing?

Credit and Balance Sheet

• How much debt does the issuer have?
• Can it cover interest and preferred dividends?
• Is the business cyclical?
• Is regulatory capital important?

Security Terms

• What is the par value?
• What is the call date?
• What is the call price?
• Is the preferred convertible?
• Is there a reset formula?
• What is the liquidation preference?

Valuation

• What is the common stock’s P/E or FCF yield?
• What is the preferred current yield?
• What is the yield to call?
• Is the preferred trading above par?
• How sensitive is it to rates?

Portfolio Fit

• Does the investment improve diversification?
• Is the position too concentrated?
• Is liquidity sufficient?
• Are taxes understood?

Key Takeaways

• Common stock and preferred stock are both equity securities.
• Common shareholders usually receive voting rights and greater growth potential.
• Preferred shareholders usually receive higher dividend and liquidation priority.
• Preferred dividends may be cumulative or non-cumulative.
• Common dividends are generally more variable.
• Preferred shares often have greater interest-rate and call risk.
• Common shareholders are last in bankruptcy priority.
• Preferred shareholders rank below creditors but above common shareholders.
• Convertible preferred stock can provide common-stock upside.
• Investors must review each preferred security’s prospectus because terms vary significantly.