Common Stock vs. Preferred Stock: What’s the Difference? (2024)

Common stock and preferred stock are the two types of stock issued by a company to raise money for their business. Though both common and preferred stock represent ownership in a company for an investor, they’re two different types of investments with differing risks, returns and purposes.

Common stock comes with voting rights and greater fluctuations in share price. Dividends are paid out when the corporation’s board of directors declare them.

Preferred stock is often called a “hybrid security” because its fixed-income dividend behaves like a bond even though it’s an equity investment. It comes with preferential status to other investors, which is where it gets its name. The increase in preferred stock share price is modest.

Common Stock vs. Preferred Stock: What’s the Difference? (2)

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Common stock vs. preferred stock: Key differences

This is a summary of the major differences between common and preferred stock.

	Common stock	Preferred stock
Share price	More potential for growth, but also for contractions.	Modest growth in value.
Income	Usually based on capital appreciation of share price and board-declared dividends.	Reliable dividend income. Usually higher yields than Treasuries or bonds.
Dividend	Varies, if offered at all. Dividend paid after preferred stockholders.	More consistent dividend, may be a fixed or fixed-to-floating rate dividend. Paid before common stockholders.
Stock conversion	Not converted to preferred stock.	Some may be able to be converted to common stock.
Voting rights	Yes	No
Volatility	High	Low
Purpose	Issued to raise capital for various business reasons, such as growth, paying off debt, or expanding into a new market.	Issued to raise capital for the company without affecting common stock; venture capitalists may demand preferred stock in the terms of their deal with owners.
Bankruptcy/Liquidation Preferences	Last paid in bankruptcy.	Priority stockholder in bankruptcy, but does come after bondholders.
Strategic benefit summary	Influence company with voting rights, benefit from price appreciation of the stock.	Solid, almost guaranteed dividend return for investors. Venture capitalists may want this type of stock to ensure they’re paid if the company fails.

Share price

When it comes to the share price, the common stock price is the one you’ll see reported in the news and the one with greater fluctuations. It has a greater upside, but investors will also ride the downswings. For common stock, the price of a share is important. Increases mean investors earn income.

The preferred stock price has more gradual growth in its share price. The price is determined by dividing the total amount of dividends for the year by the money raised from issuing preferred stock.

Income

Earning income from common stock is often based on capital appreciation as the value of the stock goes up when the business succeeds. There may be dividends, but they can only be paid out after preferred stock dividends are paid out.

Earning income from preferred stock is primarily through the dividend offered. There’s a set rate offered on the dividend of preferred stock, much like a bond.

Dividends

Dividends for preferred stock are treated differently from those for common stock. With preferred stock, the dividend is fixed. It’s paid out first, before dividends on common stock can be calculated.

Dividends on common stock are paid second and depend on how they’re set up by the corporation’s board. They may be paid out quarterly or whenever the board of directors declares a dividend payout.

Stock conversion

It may be possible in certain instances to convert preferred stock to common stock, but not the other way around.

Voting rights

When it comes to voting rights, only investors with common stock have them. Common stock offers investors voting rights, which gives them influence in the company. Preferred stock does not offer investors voting rights.

Volatility

Common stock has much more volatility in share price than preferred stock. Volatility comes from daily price swings resulting from market forces at play.

Purpose

Companies have different reasons for issuing common versus preferred stock. There is no set amount for how much stock a company issues in common and preferred stock, but, in general, the amount of common stock issued is far greater. For common stock, corporations looking to go public may want to expand their business, pay off debt, attract and compensate potential employees, or raise awareness for their business.

When corporations issue preferred stock, it is also to raise money, but generally doesn’t affect common stock investors since there are no voting rights. It’s also less costly for the company.

Bankruptcy/liquidation preferences

Common stock is different from preferred stock in case of bankruptcy. Preferred stock receives preferential treatment, meaning, those stockholders are paid first if there are any assets left to liquidate when a company goes under. Common stockholders are only paid after preferred stockholders are paid.

When is a common stock the right choice?

Investors who can ride the ups and downs of market fluctuations may see a greater upside in share price than an investor in preferred stock. Common stock investors also have voting rights and can share in dividends when they’re declared.

When is a preferred stock the right choice?

Investors who are looking for steady dividend income and preferential liquidation status (should the company declare bankruptcy) may want to consider preferred stock. Additionally, preferred stock is usually what venture capitalists demand to help protect their investment in a company. If you’re looking for more advice, it may be a good idea to consult a financial advisor. Companies such as SmartAdvisor by SmartAsset can help you find one.

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TIME Stamp: Choose between more safety and greater (potential) rewards

Investing in either common or preferred stock grants you factional ownership in a company, but your money will grow differently depending on which investment you choose. Common stock investments have a potentially larger reward, but also come with more risk because they’re exposed to the market. Preferred stock investments are a safer investment with fixed-income dividends, but investors may miss out on a share’s appreciation they would get with common stock.

Frequently asked questions (FAQs)

What is a common stock?

A common stock is a class of stock issued by a company that represents a portion of ownership in the company. It comes with voting rights, a share in dividends when issued by the company, and some liquidation rights in the case of bankruptcy. Corporations issue stock to raise money for operations and growth. It’s the type of stock most people buy when investing in stocks.

What is a preferred stock?

A preferred stock is a class of stock characterized by a set dividend payment with a rate of return comparable to a bond. Preferred stock also has priority in bankruptcy liquidation, but doesn’t have any voting rights. It's looked at as a hybrid investment that has equity, but acts like a bond.

How do you buy and sell preferred or common stocks?

Investors can buy and sell both preferred and common stocks with a brokerage. It may also be possible to buy preferred stocks from a direct stock plan, a dividend reinvestment plan, or a stock fund. An app like M1 Finance may be able to help you make these trades.

Is preferred stock safer than common stock?

The income earned from preferred stock dividends is a set rate and is generally considered a safer investment than common stock. The share price of preferred stock is much less volatile than the share price of common stock. Venture capitalists generally demand preferred stock in their deals so they can have priority in case of bankruptcy and liquidation.

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FAQs

Common Stock vs. Preferred Stock: What’s the Difference? ›

Key Takeaways. The main difference between preferred and common stock is that preferred stock gives no voting rights to shareholders while common stock does. Preferred shareholders have priority over a company's income, meaning they are paid dividends before common shareholders.

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Which is better, preferred or common stock? ›

Common stock investments have a potentially larger reward, but also come with more risk because they're exposed to the market. Preferred stock investments are a safer investment with fixed-income dividends, but investors may miss out on a share's appreciation they would get with common stock.

Who gets preferred stock? ›

Your VCs will get preferred stock; unlike your common stock, it will come with special privileges. Liquidation preferences reduce investor risk; understand what they'll mean in different scenarios. Don't come to the negotiating table without consulting with an experienced advisor first.

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What is an example of a preferred stock? ›

What Is an Example of a Preferred Stock? Consider a company is issuing a 7% preferred stock at a $1,000 par value. In turn, the investor would receive a $70 annual dividend, or $17.50 quarterly. Typically, this preferred stock will trade around its par value, behaving more similarly to a bond.

What is an example of a common stock? ›

It's common for companies to have millions or billions of outstanding shares that represent the company's overall ownership. Because of this, common stock is referred to as an equity security. Example: Coca-Cola is the issuer of Coca-Cola stock. Example: the investor is long (owns) 100 shares of GE stock.

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Why would someone want preferred stock over common stock? ›

Most shareholders are attracted to preferred stocks because they offer more consistent dividends than common shares and higher payments than bonds. However, these dividend payments can be deferred by the company if it falls into a period of tight cash flow or other financial hardship.

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Why would you buy preferred stock? ›

Preferred stock is attractive as it usually offers higher fixed-income payments than bonds with a lower investment per share. Preferred stockholders also have a priority claim over common stocks for dividend payments and liquidation proceeds. Its price is usually more stable than common stock.

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What is the downside of preferred stock? ›

They also go without voting rights. Preferred stocks are riskier than bonds – and ordinarily carry lower credit ratings – but usually offer higher yields. Like bonds, they are subject to interest-rate and credit risk.

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What are the risks of preferred stock? ›

Since preferred stock comes with a fixed dividend yield, they are highly sensitive to interest rates. If market-wide interest rates rise above the yield of a preferred stock, it will become harder to sell that stock on the market, and investors would have to accept a steep discount if they wish to sell.

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When should you buy preferred stock? ›

Investors that are looking for income and are willing to take some risk for higher yields could consider preferreds, but investors with more-conservative to moderate risk tolerances might want to consider investment-grade corporate bonds instead.

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Does Coca-Cola have preferred stock? ›

CocaCola annual total common and preferred stock dividends paid for 2023 were $-7.952B, a 4.41% increase from 2022.

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What is another name for preferred stock? ›

Preferred stock (also called preferred shares, preference shares, or simply preferreds) is a component of share capital that may have any combination of features not possessed by common stock, including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument.

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What is a 5% preferred stock? ›

A 5%, $100 par preferred stock pays $5 in cash dividends annually. 5% is the dividend rate of the preferred stock, but it isn't necessarily the yield. The yield of an investment involves all aspects of the return. Specifically, it factors in the price paid for the investment, while the dividend rate does not.

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What is preferred stock in simple terms? ›

Preference shares, more commonly referred to as preferred stock, are shares of a company's stock with dividends that are paid out to shareholders before common stock dividends are issued. If the company enters bankruptcy, preferred stockholders are entitled to be paid from company assets before common stockholders.

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What is a common stock for dummies? ›

Common stock is an ownership share in a company that may come with voting rights and dividend payments. Common stock differs from preferred stock in its voting rights, dividend payments and liquidation priority.

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Who uses common stock? ›

Since they are publicly traded, anyone can invest in common stocks. Investment bankers, among other corporate finance professionals, can use common stock prices on the exchange to determine the company's performance. investment banking also publicizes private entities through the initial public offering (IPO).

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What is more risky, common stock or preferred stock? ›

For common stock, when a company goes bankrupt, the common stockholders do not receive their share of the assets until after creditors, bondholders, and preferred shareholders. This makes common stock riskier than debt or preferred shares.

Is common or preferred stock more risky? ›

Because common stock is more volatile, it is considered a higher risk investment than preferred stock. But common stock also has the potential to accumulate capital appreciation in the long run, which can significantly increase the investment value.