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Compare Preferred vs Common Stock & Know Which is Better?

compare the difference between preferred stock and common stock and decide where you want to invest.

Knowing the differences between preferred and common stock is key for investors. This helps them match their portfolios to their financial goals. Common stock gives voting rights and a chance to grow in value. This makes it attractive for people who want growth and a say in company decisions.

Preferred stock offers fixed dividends and priority for asset distribution in liquidation. This appeals to investors who want steady income and less risk. This article explores the main differences between these two types of equity and examines their key aspects to help you make smart investment choices.

What are Common Stocks?

Common stocks, or ordinary shares, show ownership in a company. Shareholders typically vote on important matters, including selecting the board of directors and approving mergers.

Common stocks can offer shareholders dividends and capital gains, making them attractive for long-term investors who want growth.
Owning common stock comes with risks. The profit potential comes from the increasing stock price, not dividends.
A company usually sells common stock to raise money for growth or operations. This lets investors own a small part of the firm.

What are Preference Stocks?

Preference shares, also known as preferred stock, are equity securities. They usually pay a fixed dividend and have priority over common stocks in case of bankruptcy or dissolution.

Preferred stockholders don’t vote. However, they receive dividend income before common stockholders do.
They are usually less volatile than common stocks, which attracts investors who seek income and stability instead of growth.
Preference shares combine features of both bonds and equity. They offer a steady return and some ownership in the company.

Difference Between Common Stocks and Preferred Stocks

When investing in the stock market, it’s essential to know the differences between common and preferred stock. The following table provides an overview of their key distinctions:

Basis of Comparison	Common Stocks	Preferred Stocks
Ownership Rights	With common stock, you are a partial company owner with voting rights and the right to vote on corporate policies and to elect a board of directors.	Preferred stockholders are also partial owners but typically do not have voting rights and cannot influence corporate governance.
Dividend Payments	Dividends are discretionary and not guaranteed. Common shareholders will only receive dividends after the preferred shareholders receive their dividends.	Dividends are typically fixed and paid periodically; corporate governance may outline when the dividends will be paid.
Capital Appreciation	Common stocks potentially have more capital gains because the market price of common stocks can rise significantly as the company’s performance and market conditions change over time.	Preferred stocks have limited capital appreciation and are more stable since traders and investors receive fixed dividends.
Liquidation Priority	If a company is liquidated, common stockholders receive the company’s remaining assets only after all debts, including creditors and preferred shareholders, have been paid.	Preferred stockholders rank above common stockholders in liquidation but below debt holders.
Voting Rights	Common stockholders have voting rights and can vote on major matters, such as acquisitions and mergers, and the election of board members.	Preferred stockholders do not typically have voting rights; any preferred stock with voting rights may only do so in limited situations.
Risk	Common stock is riskier due to price volatility and lower in the claim order, even though there could be a greater upside than preferred stock.	Preferred stock is less risky mainly because investors are entitled to fixed dividends and priority in liquidation, making preferred stock less risky than common stock and more stable investments.
Price Volatility	Common stocks are typically far more volatile in terms of their prices, especially in relation to company performance, market conditions, and general economic conditions.	Preferred stock is less volatile than common stock and more like fixed-income investments.
Convertibility	Common stock cannot be converted into any other type of stock.	Some preferred stocks can be converted to common stocks, offering potential upside if the company continues to perform well in its industry.
Income Stability	Dividend income can be unpredictable and can change or be eliminated during hard times.	Preferred stocks have stable and predictable dividend income, which appeals to income-seeking investors.
Investor Profile	Common stocks are appropriate for investors who seek growth with a tolerance for higher risk.	Preferred stock is appropriate for conservative investors with a steady income and lower risk.
Issuance Purpose	Common stock is usually issued to obtain capital and has a broad base of ownership that may include employees and the public.	Preferred stocks are usually issued to attract investors looking for fixed income and capital while avoiding dilution of control.

Advantages of Common Stocks and Preferred Stocks

Common and preferred stocks have different features that benefit different investment objectives. The following table summarises their key benefits:

Aspect	Advantages of Common Stocks	Advantages of Preferred Stocks
Ownership Rights	Provides the opportunity for voting rights, allowing shareholders to participate in corporate decisions.	Offers ownership without governance-related responsibilities.
Capital Appreciation	Positioned to provide the highest potential for growth over the long term.	It offers limited opportunity for price appreciation and provides more price stability by lending it to conservative investors.
Priority in Liquidation	Common stockholders are the last to receive payouts after creditors and preferred stockholders have been paid.	Preferred stockholders will be paid first in a liquidity event, offering them more assurance of asset recovery.
Trading Liquidity	Highly liquid, common stocks frequently trade on major exchanges.	Moderately liquid; preferred stocks will not trade as frequently as common stocks.
Inflation Hedge	Capital appreciation and reinvested dividends can beat inflation in the long run.	Less effective as an inflation hedge, but it offers reliable returns in low-interest environments.

Disadvantages of Common Stocks and Preferred Stocks

Common and preferred stocks come with certain disadvantages that an investor must understand. Below are the disadvantages of common and preferred stocks:

Aspect	Disadvantages of Common Stocks	Disadvantages of Preferred Stocks
Market Volatility	Common stocks are highly volatile. Prices of common shares can change significantly.	Preferred shares are also sensitive to interest rate risk; rising interest rates may potentially lower the value of preferred shares
Dividend Uncertainty	Common stock dividends are not guaranteed and may be suspended during economic downturns.	Preferred dividends are fixed and may never rise, meaning income will likely not grow.
Trading Liquidity	Common shares can sometimes become illiquid during market downturns or lower-volume trading.	Preferred shares are typically much less liquid than common shares; therefore, the ability to sell will be much lower.
Risk Exposure	Exposed to business risks, market cycles, and management decisions that can adversely affect stock value.	Preferred shareowners carry lower risk exposure to market cycles. However, preferred shares are still sensitive to credit risk.

Which is Better Between Preferred Stock & Common Stock?

Whether common or preferred stock is better depends on an investor's preferences and market outlook.

Common stock is better for those who want to benefit from the company's growth. It also gives them a say in management decisions. It's a smart choice for those who plan long-term, can handle market ups and downs, and want to grow their capital.
Preferred stock appeals to investors seeking stable income with lower risks. It is more stable because dividends are fixed at a certain level. Also, preferred stock has a stronger claim on the company's assets during liquidation.
Neither is better overall. They each meet different investment goals. If you want aggressive growth and control, you should own common stock. For a stable income and to keep your capital safe, preferred stock is a good choice. Many investors seek both stock types. This helps them balance growth and income in their portfolios.

In conclusion, whether to invest in common or preferred stock depends on your goals. If you want a growing investment, common stock is your best choice. If you want less risk and steady dividend income, preferred stock is better. Aligning your stock choices with your financial goals helps boost your portfolio's potential. This approach allows you to invest with greater confidence.

Disclaimer: The information provided on this website is for general informational purposes only and should not be construed as financial, investment, or legal advice. While we strive to provide accurate and up-to-date content, we do not guarantee the completeness, reliability, or suitability of the information for your specific needs.

We do not promote or endorse any financial product or service mentioned in these articles. Readers are advised to conduct their own research, consult with financial experts, and make informed decisions based on their unique financial circumstances. Any reliance you place on the information provided here is strictly at your own risk.

FAQs about Preferred Stock vs Common Stock

What is a Common Stock?

Common stock gives you a stake in the company. It allows shareholders to vote, earn dividends, and benefit from increased value. It is the most common type of stock people invest in.

What is a Preferred Stock?

Preferred stock is a share of capital. It can include features that common stock lacks. This means it may act like both equity and debt instruments. It is generally classified as a hybrid instrument.

What is the main difference between common stock and preferred stock?

Common stock offers voting rights and a better chance for growth. Preferred stock provides fixed dividends and priority in liquidation. However, it doesn’t come with voting rights.

Which stock is riskier: common stock or preferred stock?

Common stocks are riskier. Their prices can change significantly. Also, they have a lower claim priority if a company is liquidated. Preferred stocks are generally stable but have limited growth.

Can preferred stocks be converted into common stocks?

Yes, some preferred stocks can become common stocks, allowing investors to enjoy the chance for capital growth.

Do common stockholders always receive dividends?

Common stock dividends are not guaranteed. They depend on the company's profits and the board's decisions.

Why do companies issue preferred stock?

Companies issue preferred stock to attract conservative investors. These investors seek stable income and help the company raise money.

Who gets paid first during liquidation: common or preferred stockholders?

Preferred stockholders have an upper claim to assets in a liquidation before common stockholders get paid.

Do preferred stocks provide voting rights?

No, preferred stockholders cannot vote for corporate matters like common stockholders. Preferred stock usually does not have voting rights.

Which is better for long-term growth: preferred or common stock?

Common stock is better for long-term growth. It has a higher chance of increasing in value over time.

Are dividends from preferred stocks guaranteed?

Yes, preferred stock dividends are usually fixed and paid regularly. However, they can be suspended during severe financial trouble.

Why might an investor choose common stock over preferred stock?

Investors often prefer common stock for its potential higher returns, voting rights, and chances of capital growth.

Is it possible to lose money with common or preferred stocks?

Yes, you can lose money in both common and preferred stock. Common stocks carry risks from market volatility. In contrast, preferred stocks face credit, interest rates, and liquidity risks.

Which stock offers better liquidity: common or preferred stock?

Common stocks are usually easier to buy and sell. They are traded more often than preferred stocks, which are less liquid.

What is cumulative preferred stock?

Cumulative preferred stock is a kind of preferred stock that ensures shareholders receive dividend payments. If any dividends are missed, they accumulate as dividends in arrears and are paid later, before any dividends go to common stockholders..

Which type of investor benefits most from preferred stocks?

A conservative investor should consider preferred stock. It offers fixed dividends, which provide steady income at low risk. This helps keep the investor's capital engaged.

How do economic conditions impact common and preferred stocks?

Common stocks react more to economic cycles. Their prices change often due to business activity. Preferred stock will change, but not as much. It is more affected by interest rates.

Disclaimer

This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.

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Author: Team Digit

Last updated: 02-06-2025