When people talk about buying stocks, they are usually talking about common stock. However, companies can issue another type of equity called preferred stock, and the differences between the two can significantly affect an investor’s income, voting rights, risk, and potential returns.

Understanding Common Stocks vs Preferred Stocks is easier when you think about what each investor receives in exchange for providing capital. Common shareholders usually get voting rights and greater participation in a company’s potential growth.

Preferred shareholders typically give up some of that influence in exchange for greater priority when dividends are paid and if company assets are distributed after liquidation.

Neither type is automatically better. They simply serve different investment objectives.

What Are Common Stocks?

Common stock represents an ownership interest in a company. Investors who own common shares can potentially benefit from rising share prices, dividend payments, and voting rights.

Voting rights can allow shareholders to participate in decisions such as electing members of the board of directors. However, the exact voting structure depends on the company. Some businesses use multiple classes of common stock with different voting powers.

For example, one class might provide one vote per share while another gives founders significantly more voting power.

Common shareholders also have greater exposure to the company’s long-term fortunes. If a successful business grows dramatically over many years, its common shares may appreciate significantly.

The downside is that nothing guarantees that growth.

What Are Preferred Stocks?

Preferred stock is also an equity security, but its characteristics can sometimes feel like a mixture of stocks and bonds.

Preferred shareholders usually do not have the same voting rights as common shareholders. Instead, one of their main advantages is priority: preferred shareholders generally receive dividend payments before common shareholders and rank ahead of common shareholders if a company is liquidated.

Preferred shares may also be issued with specific dividend terms.

For example, some preferred securities have a stated dividend rate based on their liquidation preference. Other preferred shares may include additional features such as cumulative dividends, conversion rights, or redemption provisions, depending on their individual terms.

This means you should never assume all preferred shares work identically. The prospectus and company filings matter.

Common Stocks vs Preferred Stocks: Dividend Differences

Dividends are one of the biggest distinctions between the two structures.

Companies can pay dividends to common shareholders, but those distributions are not automatically guaranteed. Management and the board may decide to increase, reduce, suspend, or eliminate common dividends depending on financial conditions.

Preferred shareholders generally have greater dividend priority. Investor.gov states that preferred shareholders receive dividend payments before holders of common stock.

Imagine a company has both preferred and common shares outstanding. If financial conditions become difficult and the amount available for shareholder distributions is limited, the rights attached to the preferred shares may require those shareholders to receive priority before common shareholders can receive dividends.

Some preferred securities are also cumulative. Depending on their specific terms, unpaid dividends can accumulate and may need to be addressed before common shareholders receive dividends.

Always read the actual terms rather than assuming that “preferred” means the dividend can never be missed.

Which Type Has Better Growth Potential?

Common shares generally provide more direct participation in a company’s growth.

Suppose an investor buys common shares in a company at $30. Several years later, the company has expanded internationally, increased profits, and attracted significantly greater investor demand. If its share price reaches $90, the investor has potentially earned substantial capital appreciation.

Preferred shares may behave differently.

Their investment appeal is often more closely linked to dividend income and their specific terms, so their price may not participate in business growth in quite the same way as common stock.

This does not mean common shares always outperform preferred shares. Stock prices can fall, and shareholders can lose money when businesses perform badly or investors become less optimistic. Investor.gov notes that stocks can provide long-term growth potential but also fluctuate significantly, with no guarantee that an individual company will succeed.

The trade-off is therefore often greater upside potential versus greater income priority, though the exact balance depends on the individual security.

What Happens if the Company Goes Bankrupt?

This is where the word “preferred” becomes especially important.

If a company fails and its assets are liquidated, different groups have different priorities. Bondholders generally rank ahead of shareholders. Preferred shareholders then have priority over common shareholders, while common investors are typically among the last parties entitled to whatever remains.

Imagine a company enters liquidation with $100 million in assets but owes creditors $90 million.

That does not automatically leave $10 million for common shareholders. Other claims, including preferred shareholders’ liquidation rights, may need to be satisfied first.

Common shareholders could receive very little—or nothing.

Preferred status therefore provides better positioning relative to common equity, but preferred shareholders still rank behind creditors and bondholders. Preferred stock should not be mistaken for a guaranteed investment.

Voting Rights Can Be Very Different

Common shareholders typically have voting rights, giving them some ability to influence corporate governance. Preferred shareholders generally do not.

Even common-stock voting rights are not always equal.

A company may use a dual-class structure in which different classes of common shares carry different numbers of votes. FINRA notes that some structures allow founders or other shareholders to receive multiple votes for each share while ordinary shareholders receive one vote per share.

For a small retail investor, voting power may not seem particularly important. But governance rights can matter when shareholders vote on directors and other significant corporate issues.

Investors should therefore check the share class instead of assuming every ticker represents identical ownership rights.

Some Preferred Shares Can Be Converted

Another interesting feature is that certain preferred shares are convertible.

A convertible security can allow its holder to exchange the preferred security for common shares according to predetermined terms. Investor.gov notes that preferred stock is one type of security that may carry conversion rights.

Imagine owning convertible preferred shares that can eventually be exchanged for common stock.

If the company’s common shares rise significantly, conversion might become attractive because the investor could participate more directly in the upside.

However, conversion terms can be complicated. Ratios, prices, timing requirements, dilution, and other provisions may materially affect the outcome. Investor.gov recommends understanding the precise structure and potential consequences of convertible securities before investing.

Preferred stock is therefore not necessarily a simple income investment.

Which Is Better for Investors?

The answer depends on what you want your portfolio to accomplish.

Investors primarily interested in long-term capital appreciation and ownership rights may find common stock more appropriate. It provides more direct exposure to company growth and usually includes shareholder voting rights.

Preferred stock may appeal more to investors interested in income and priority over common shareholders. However, preferred shares still carry company-specific risk, price risk, liquidity risk, and other potential uncertainties. All investments involve some degree of financial risk.

Before choosing either type, research the company as well as the security itself.

The SEC’s EDGAR system provides access to public-company filings, including annual reports, quarterly reports, current reports, and other disclosures that investors can use to research financial performance and material risks.

Do not buy preferred stock simply because its dividend looks attractive, and do not buy common stock simply because its price has recently risen.

Understand what rights you are actually purchasing.

The Common Stocks vs Preferred Stocks comparison comes down to different priorities. Common stock generally offers voting rights and greater exposure to a company’s long-term growth, while preferred stock usually provides dividend and liquidation priority over common shareholders.

Neither eliminates investment risk, and the exact rights attached to a security can vary significantly between companies.

Before investing, study the dividend terms, voting rights, financial health of the issuer, liquidation preference, and any conversion or redemption provisions.