Preferred Stock vs Common Stock: The Basics
Preferred stock and common stock are the two main classes of equity a company can issue, each carrying different rights regarding dividends, voting, and claims on assets. Common stock represents standard ownership with voting rights, while preferred stock offers priority on dividends and asset claims but typically without voting power.
What Is Common Stock?
Common stock is the most widely held type of equity, giving shareholders voting rights on corporate matters such as electing the board of directors, along with a residual claim on the company’s assets and earnings after all other obligations are met. Common stockholders benefit most from a company’s long-term growth and share price appreciation.
What Is Preferred Stock?
Preferred stock functions as a hybrid between stocks and bonds, typically paying a fixed dividend that must be paid before any dividends go to common shareholders. Preferred shareholders generally do not have voting rights but have a higher claim than common shareholders on company assets in the event of liquidation.
Preferred Stock vs Common Stock Comparison Table
| Feature | Common Stock | Preferred Stock |
|---|---|---|
| Voting rights | Yes, typically one vote per share | Usually none |
| Dividend payment | Variable, not guaranteed | Fixed, paid first |
| Priority in liquidation | Lowest (paid last) | Higher than common, below debt |
| Price appreciation potential | Higher (unlimited upside) | Lower (bond-like, capped) |
| Volatility | Higher | Generally lower |
Types of Preferred Stock
Cumulative vs Non-Cumulative Preferred Stock
Cumulative preferred stock requires that any missed dividend payments accumulate and must be paid in full before common shareholders receive dividends, while non-cumulative preferred stock has no such requirement, meaning missed dividends are simply forfeited.
Convertible Preferred Stock
Convertible preferred stock gives holders the option to convert their preferred shares into a predetermined number of common shares, allowing investors to benefit from potential common stock price appreciation while still enjoying preferred dividend priority in the meantime.
Choosing Between Preferred and Common Stock
When Common Stock May Be More Suitable
Investors seeking long-term capital appreciation, willing to accept higher volatility, and wanting a voice in corporate governance through voting rights, typically gravitate toward common stock as the primary building block of a growth-oriented portfolio.
When Preferred Stock May Be More Suitable
Income-focused investors who prioritize predictable dividend payments and lower volatility, similar to bond investing, may find preferred stock more appealing, especially since preferred dividends are often higher than common stock dividend yields.
Frequently Asked Questions
Can a company have both preferred and common stock?
Yes, many companies issue both. This allows them to raise capital from investors with different risk and return preferences while common shareholders retain voting control over the company.
Is preferred stock safer than common stock?
Preferred stock is generally considered less volatile and has priority over common stock for dividends and liquidation proceeds, but it still carries more risk than bonds and is not guaranteed like a fixed-income security.
Do preferred shareholders get any say in the company?
Typically no, except in specific circumstances such as when dividend payments are missed for an extended period, which can sometimes trigger limited voting rights depending on the terms of the preferred stock issuance.
Why do companies issue preferred stock instead of just bonds?
Preferred stock offers companies more flexibility than debt since dividend payments (unlike bond interest) can be suspended without triggering default, and preferred stock does not appear as a liability that increases the company’s debt ratios.
Key Takeaways
Common stock offers voting rights and greater long-term growth potential but comes with higher volatility and lower priority in dividends and liquidation, while preferred stock offers more predictable income and higher claim priority but typically without voting rights. The right choice depends on whether an investor prioritizes growth and governance or stable income and reduced risk. This article is for informational purposes only and does not constitute investment advice.
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