The Difference Between Common and Preferred Stock

Both common and preferred stock are shares of ownership in a company. Shares represent a slice of that company. If its business grows and profits rise, shareholders can make money as the value of their stake increases.

Common Stock

Common stock can be more volatile than preferred stock because it relies on a company’s financial health to determine its price. If a company is having problems, common shares may fall, but if a company is doing well, they can offer more growth potential.

Shareholders of common stock have voting rights. Usually it’s one vote per share, so the more shares you own, the greater your voting power. Shareholders get a say on major corporate decisions, such as executive compensation, electing a board of directors, and mergers and acquisitions.

Owners of common stock can also receive income in the form of dividends. These are cash payments, usually made once a quarter, that some companies take out of their profits to reward shareholders. The amount of the dividend can change, however, or it can be eliminated entirely.

If a company goes under, common stockholders are usually last in line to get paid after all the assets are sold off.

Preferred Stock

Preferred stock trades on an exchange like common stock, but there are generally fewer shares available, and they don’t change as much in value. That stability can mean less growth.

Owners of preferred stock also usually don’t have voting rights. The tradeoff is that they get paid dividends before common shareholders do, hence “preferred,” and the payouts are usually higher.

Preferred stock is often called a “hybrid” security because it offers characteristics of both stocks and bonds. Dividends are fixed when the stock is issued, and they don’t change in value, which gives investors a guaranteed flow of income, like a bond. 

And just like bonds, preferred shares generally rise in price when interest rates drop, and they fall in price when interest rates go up.

Preferred stock also has a feature similar to bonds known as "callability." After a predetermined time, the issuer has the right to redeem, or call back, the shares. The redemption rate can be a lot higher than how much you paid for your preferred stock.

Shareholders of preferred stock also get paid ahead of common stockholders if a company goes under.

Which One Fits Your Portfolio

The choice usually comes down to whether you’re investing for growth or for income. 

Common stock may be more volatile, but it rewards patience and tolerance for price swings, because it usually offers more potential to increase value than preferred stock.. 

Investors who want a predictable, bond-like payment and are willing to give up upside and voting power may opt for preferred shares. 

Many investors hold both as part of a diversified portfolio, using common stock for growth and the steady payments of preferred shares to smooth out a portfolio’s ups and downs. 

Neither investment is a sure thing. Before buying any type of stock, do your research and decide whether or not it aligns with how much risk you’re willing to take on.