Which is better, common stock or preferred stock?

Neither is universally better; common stock suits growth investors seeking capital appreciation and voting power, whereas preferred stock fits income-focused investors who prioritize stable, predictable dividend payments.

Does preferred stock cost more than common stock?

Preferred stock often trades at a higher price per share than common stock because its fixed dividend payments create bond-like stability that investors pay a premium for.

Is preferred stock safer than common stock?

Preferred stock is generally safer because preferred shareholders receive dividends and asset payouts before common shareholders during bankruptcy, though preferred stock still carries more risk than corporate bonds.

Are common stock and preferred stock interchangeable?

Common stock and preferred stock are not interchangeable because they grant different rights, with common offering voting power and preferred offering fixed income, so each serves a distinct investor need.

Can I switch from common stock to preferred stock?

You can switch from common stock to preferred stock only by selling your common shares and buying preferred shares on the open market, as companies rarely offer direct conversion between the two types.

Do preferred shareholders get voting rights like common shareholders?

Preferred shareholders typically do not get voting rights, but they may gain limited voting ability on specific matters like mergers or dividend suspensions if the company misses preferred dividend payments.

What is a common beginner mistake with common and preferred stock?

A common beginner mistake is assuming preferred stock always outperforms common stock, when in reality common stock often delivers higher long-term returns through capital gains that preferred stock lacks.

Why would a company issue preferred stock instead of common stock?

A company issues preferred stock instead of common stock to raise capital without diluting existing shareholders' voting control, while attracting investors who want steady dividends rather than ownership influence.

What happens to common and preferred stock when a company goes bankrupt?

When a company goes bankrupt, preferred shareholders get paid from remaining assets before common shareholders, but both typically lose their entire investment if liabilities exceed available assets.

Difference Between

Difference Between Common Stock and Preferred Stock

Written byNex Virox Team

Editorial Team

Reviewed byVarshal Nirbhavane

Senior SEO & Organic Growth Professional · 5+ years

Published: August 30, 202618 min read

Quick answer

The main difference between Common Stock and Preferred Stock is that common stock grants voting rights and variable dividends, while preferred stock offers fixed dividends and priority claims but no voting rights. Common Stock is an ownership share with voting power and profit-based dividends, while Preferred Stock is a hybrid security with fixed payouts and higher claim priority.

Key takeaways

Core distinction: Common stock grants voting rights and variable dividends, while preferred stock offers fixed dividends without voting power.
How each works: Common shareholders share profits through fluctuating dividends and capital gains, whereas preferred shareholders receive predetermined, priority payouts first.
Risk and reward: Common stock delivers higher potential returns with greater volatility, while preferred stock provides steadier income with lower upside growth.
Best-fit use case: Choose common stock for long-term growth investors; choose preferred stock for income-focused investors seeking predictable quarterly cash flows.
Common decision mistake: Investors often ignore preferred stock's callable feature, which lets companies redeem shares early and cap total returns unexpectedly.

Table of Contents18 sections

Difference Between Common Stock and Preferred Stock: Comparison Table

Aspect	Common Stock	Preferred Stock
Definition	Equity ownership share granting proportional claim on company assets and earnings.	Hybrid equity security combining stock ownership with fixed dividend preference over common holders.
Purpose	Raises growth capital while distributing voting control across shareholders.	Raises capital without diluting voting power or management control.
Core Mechanism	Owner receives residual profits after all obligations and preferred claims are satisfied.	Owner receives fixed dividend before any common dividend is declared.
Voting Rights	Typically one vote per share for board elections and major corporate decisions.	Usually no voting rights, except special situations like missed dividend payments.
Dividend Type	Variable dividends set by board discretion based on profitability and cash needs.	Fixed dividend rate set at issuance, often stated as percentage of par value.
Dividend Priority	Paid last, only after preferred dividends and debt interest are fully satisfied.	Paid before common dividends but after bond interest payments.
Liquidation Preference	Receives remaining assets last, only after all creditors and preferred holders are paid.	Claims assets ahead of common holders but behind all debt obligations.
Par Value	Often zero or nominal value with no effect on dividend calculations.	Has stated par value, typically $25 or $100, used to compute dividend amounts.
Dividend Rate	Fluctuates with earnings, with no guaranteed minimum or maximum payout.	Fixed rate, often 4-8% of par value, set permanently at issuance.
Cumulative Feature	Missed dividends are permanently lost and never owed to shareholders later.	Missed dividends accumulate as arrears and must be paid before common dividends resume.
Convertibility	Cannot convert into any other security class under normal circumstances.	Convertible preferred can exchange into fixed number of common shares at holder's option.
Callability	Company cannot force repurchase from shareholders at a set price.	Issuer can redeem shares at call price, usually par plus premium, after specified date.
Price Volatility	Prices swing widely with earnings news, market sentiment, and growth expectations.	Trades closer to par value with smaller daily price movements than common shares.
Upside Potential	Unlimited capital appreciation as company earnings and valuation grow over time.	Limited upside capped near call price or conversion value, typically par plus premium.
Downside Risk	Share price can fall to zero if company fails or declares bankruptcy.	Retains claim ahead of common, so losses are smaller in bankruptcy scenarios.
Income Stability	Income varies quarterly with board decisions and business performance cycles.	Provides predictable, contractually fixed income stream similar to bond coupons.
Growth Potential	Directly benefits from earnings growth, expansion, and rising share prices.	Growth limited to conversion option value; primary return is income, not appreciation.
Cost of Capital	Cheaper for issuer because investors accept higher risk for potential returns.	More expensive for issuer due to fixed dividend obligation and priority claims.
Maturity Date	No maturity date; shares remain outstanding indefinitely until company repurchases.	Perpetual unless called, though some issues carry mandatory redemption dates.
Credit Rating	Unrated as equity; no credit agency evaluates common stock quality.	Often rated by agencies like Moody's or S&P, reflecting issuer creditworthiness.
Tax Treatment	Qualified dividends taxed at preferential long-term capital gains rates.	Dividends taxed as ordinary income, though some qualify for lower rates.
Market Availability	Traded on all major exchanges with deep liquidity and tight bid-ask spreads.	Traded on exchanges but with thinner volume and wider spreads than common stock.
Regulatory Oversight	Governed by SEC rules covering shareholder voting, disclosures, and proxy statements.	Subject to same SEC registration plus additional trust indenture requirements.
Issuer Type	Issued by virtually all public corporations from startups to blue chips.	Issued mainly by banks, utilities, REITs, and established dividend-paying firms.
Typical Investors	Growth-oriented individuals, index funds, pension plans, and long-term holders.	Income-focused retirees, insurance companies, and institutional yield seekers.
Example	Apple Inc. common shares trade as AAPL on NASDAQ with voting rights.	Bank of America preferred series L pays fixed 6.0% dividend per annum.
Limitation	Last claim on assets, no guaranteed returns, and full exposure to downturns.	Limited appreciation, call risk, interest-rate sensitivity, and no voting power.
Best-Fit Scenario	Long-term wealth building where capital appreciation outweighs income needs.	Stable income portfolios requiring predictable cash flow with lower volatility.

What Is Common Stock?

Common stock is a security that represents ownership in a corporation. It gives shareholders voting rights and a claim on a portion of company profits, typically paid as dividends. It exists to raise capital while distributing control and financial upside to investors.

Definition of Common Stock

Common stock is an equity instrument that confers proportional ownership, voting rights, and residual claims on a company's assets and earnings after all debts and preferred obligations are settled. Shareholders bear the highest risk but capture the greatest potential reward through capital appreciation and variable dividends.

Key Characteristics of Common Stock

Characteristic	What It Means in Practice
Voting Rights	Each share typically grants one vote at shareholder meetings on board elections and major corporate actions.
Residual Claim	Common shareholders receive assets only after creditors and preferred stockholders are fully paid in liquidation.
Variable Dividends	Dividends are discretionary and fluctuate with company profitability; the board can cut or eliminate them anytime.
Unlimited Upside	Share price has no ceiling, so long-term capital gains are theoretically uncapped as the company grows.
Limited Liability	Shareholders cannot lose more than their investment; personal assets are never at risk for corporate debts.
Perpetual Existence	Shares do not mature or expire, so ownership continues indefinitely until the shareholder sells or the firm dissolves.
Preemptive Rights	Some issues allow existing holders to buy new shares before the public, preventing dilution of their stake.
Market Liquidity	Listed common stock trades daily on exchanges, enabling quick conversion to cash at prevailing market prices.
Price Volatility	Values swing sharply with earnings news, economic conditions, and investor sentiment, creating both risk and opportunity.
Lowest Priority	In bankruptcy, common stockholders are last in line and often receive nothing after secured lenders and bondholders are paid.

Common Examples of Common Stock

Apple Inc. – a technology hardware leader whose common shares trade on Nasdaq under the ticker AAPL.
Amazon.com – an e-commerce and cloud computing giant whose common stock is listed on Nasdaq as AMZN.
Berkshire Hathaway – a holding company led by Warren Buffett with Class A shares priced at hundreds of thousands of dollars.
General Motors – a legacy automaker whose common stock trades on the New York Stock Exchange under GM.
Johnson & Johnson – a diversified healthcare and pharmaceutical firm with common shares on the NYSE as JNJ.
Visa Inc. – a global digital payments network whose Class A common stock trades on the NYSE as V.
Netflix – a streaming entertainment company whose common shares on Nasdaq are designated NFLX.
Exxon Mobil – an integrated oil and gas corporation with common stock listed on the NYSE as XOM.
Procter & Gamble – a consumer staples maker of household brands, trading common shares on the NYSE as PG.
Tesla Inc. – an electric vehicle and clean energy company whose common stock trades on Nasdaq under TSLA.

Advantages and Limitations of Common Stock

Advantages	Limitations
Voting power lets shareholders influence board composition and strategic direction directly.	Voting rights are diluted across millions of shares, so a single retail investor holds negligible sway.
Capital appreciation potential is unlimited, outpacing bonds and preferred shares over long horizons.	Share prices can fall to zero, wiping out the entire investment with no floor or guaranteed recovery.
Dividends grow over time at successful companies, providing rising income that beats fixed-rate securities.	Dividends are never guaranteed and are routinely slashed during downturns, unlike contractual bond interest.
High liquidity on major exchanges allows instant selling at transparent, competitive market prices.	Liquidity vanishes in market crashes, forcing sellers to accept steep discounts or hold through losses.
Limited liability caps the maximum loss at the purchase price, protecting personal finances from corporate failure.	In bankruptcy, common holders are last to recover and typically receive nothing after all other claims are paid.
Ownership is perpetual and transferable, offering flexibility to hold for decades or exit within seconds.	Perpetual holding exposes investors to decades of management mistakes, regulatory changes, and obsolescence risk.
Preemptive rights in some issues let existing holders maintain proportional ownership without dilution.	Most modern issues lack preemptive rights, so new share offerings silently reduce existing ownership stakes.
Transparent reporting and analyst coverage provide abundant public data for informed decision-making.	Heavy scrutiny causes overreaction to quarterly earnings, creating irrational price swings unrelated to fundamentals.
Fractional shares allow small investors to buy into expensive companies with minimal capital.	Fractional ownership still carries full downside risk, and partial shares complicate voting and dividend reinvestment.
Tax treatment on long-term capital gains is favourable, often lower than ordinary income tax rates.	Short-term trades are taxed at higher ordinary rates, and dividends face double taxation at corporate and personal levels.

What Is Preferred Stock?

Preferred stock is a hybrid ownership security that pays a fixed dividend before common shareholders receive anything. It exists to give investors steady income with higher claim priority, while sacrificing the unlimited upside potential of common stock.

Definition of Preferred Stock

Preferred stock is a class of equity ownership that grants holders priority over common stockholders for dividend payments and asset distribution upon liquidation, typically without voting rights, in exchange for a fixed, predetermined dividend rate.

Key Characteristics of Preferred Stock

Characteristic	What It Means in Practice
Fixed dividend	Pays a set dollar amount per share, usually quarterly, regardless of company earnings.
Priority claim	Receives dividends and liquidation proceeds before common shareholders get anything.
No voting rights	Holders typically cannot vote on board members or corporate policy matters.
Cumulative feature	Missed dividends accumulate and must be paid before common dividends resume.
Callable provision	Issuer can buy back shares at a set price after a specified date.
Convertible option	Holder may exchange shares for a fixed number of common shares.
Par value basis	Dividend is calculated as a percentage of the stock's stated par value.
Senior to common	Sits above common stock but below all debt in the capital structure.
Price stability	Trades closer to par value than common stock, with lower volatility.
Perpetual maturity	Has no set maturity date, though call features create effective timelines.

Common Examples of Preferred Stock

Berkshire Hathaway Series A – issued to Goldman Sachs in 2008 with a 10% dividend and warrants.
Bank of America Series L – non-cumulative preferred paying a fixed 7.25% quarterly dividend.
Wells Fargo Series Q – cumulative preferred with a 7.98% yield, issued during the 2008 crisis.
Ford Motor Series B – convertible preferred that exchanged into common shares at a set ratio.
JPMorgan Chase Series AA – non-cumulative preferred with a 5.75% fixed dividend rate.
AT&T Series A – perpetual preferred stock paying a 5.0% fixed annual dividend.
General Electric Series D – cumulative preferred issued before the 2008 financial crisis.
Public Storage Series M – real estate investment trust preferred with a 5.4% yield.
Citigroup Series J – preferred issued in 2008 with a 8.5% dividend and conversion rights.
Morgan Stanley Series E – non-cumulative preferred with a 6.875% fixed coupon.

Advantages and Limitations of Preferred Stock

Advantages	Limitations
Provides predictable income through fixed dividends that outrank common stock payments.	Fixed dividends do not grow, so inflation steadily erodes real purchasing power over time.
Offers higher claim priority on assets if the company files for bankruptcy.	Still ranks behind all bondholders and other debt, so recovery is rarely full.
Delivers lower price volatility than common stock during market downturns.	Price appreciation is capped, so holders miss major upside when the company thrives.
Pays dividends that often qualify for lower tax rates than bond interest.	Company can suspend dividends entirely if cash flow tightens, leaving holders with nothing.
Gives steady income without requiring active monitoring of voting matters.	No voting power means holders cannot influence board elections or major decisions.
Callable features allow issuers to retire high-cost capital when rates fall.	Call provisions force holders to accept early redemption at par, losing future income.
Convertible options let holders share in common stock upside if prices rise sharply.	Conversion usually triggers only when common stock already trades well above the conversion price.
Perpetual structure means no maturity date forces principal repayment at a bad time.	Perpetual structure also means no guaranteed return of principal ever, unlike bonds.
Cumulative preferreds guarantee missed dividends eventually get paid in full.	Accumulated dividends only matter if the company survives; bankruptcy wipes them out.
Priced with lower beta than common stock, reducing portfolio volatility exposure.	Liquidity is often thin, making large trades difficult without moving the price.

Similarities Between Common Stock and Preferred Stock

Shared Aspect	How Common Stock and Preferred Stock Are Alike
Equity Ownership	Common stock and preferred stock both represent fractional ownership stakes in the issuing corporation.
Issuance Method	Common stock and preferred stock are both sold through primary public offerings or private placements.
Exchange Trading	Common stock and preferred stock both trade on major exchanges like the NYSE and Nasdaq.
Capital Raising	Common stock and preferred stock both serve as tools for companies to raise external capital.
Investor Class	Common stock and preferred stock both attract institutional and retail investors seeking equity exposure.
Par Value	Common stock and preferred stock both carry a nominal par value stated on the certificate.
Board Voting	Common stock and preferred stock both grant holders voting rights on major corporate decisions.
Dividend Source	Common stock and preferred stock both derive dividend payments from the company's retained earnings.
Board Approval	Common stock and preferred stock both require board of directors approval for dividend declarations.
Shareholder Rights	Common stock and preferred stock both confer legal rights defined by corporate bylaws.
Annual Reports	Common stock and preferred stock holders both receive annual reports and financial disclosures.
Proxy Voting	Common stock and preferred stock owners both can vote via proxy without attending meetings.
Regulatory Oversight	Common stock and preferred stock are both regulated by the SEC and exchange rules.
Market Pricing	Common stock and preferred stock prices both fluctuate based on supply and demand.
Liquidity Risk	Common stock and preferred stock both face liquidity risk during market downturns.
Capital Gains	Common stock and preferred stock both offer potential price appreciation for capital gains.
Tax Treatment	Common stock and preferred stock dividends both qualify for preferential tax rates.
Brokerage Access	Common stock and preferred stock both trade through standard brokerage accounts.
Transferability	Common stock and preferred stock are both freely transferable between investors without issuer consent.
Corporate Charter	Common stock and preferred stock are both authorized by the corporate charter.
Merger Consideration	Common stock and preferred stock holders both receive consideration in mergers or acquisitions.
Bankruptcy Loss	Common stock and preferred stock both risk total loss if the company liquidates.
Earnings Claim	Common stock and preferred stock both represent claims on the company's future earnings.
Share Dilution	Common stock and preferred stock both dilute existing holders when new shares are issued.
Market Indices	Common stock and preferred stock are both included in market index calculations.
Price Discovery	Common stock and preferred stock both rely on continuous auction markets for pricing.
Investor Research	Common stock and preferred stock both require fundamental analysis of company financials.
Holding Period	Common stock and preferred stock both suit long-term buy-and-hold investment strategies.
Corporate Actions	Common stock and preferred stock both are subject to stock splits and reverse splits.
Record Keeping	Common stock and preferred stock both require transfer agent maintenance of ownership records.

Common Stock or Preferred Stock: Which Should You Choose?

The single variable that decides it for most investors is your primary goal: maximum growth versus guaranteed income. If you prioritize long-term capital appreciation and can tolerate volatility, choose Common Stock. If you prioritize steady, predictable dividend payments and capital preservation, choose Preferred Stock.

When to Use Common Stock

Choose Common Stock when you have a long investment horizon (5+ years) and seek maximum capital appreciation. It suits investors comfortable with higher price volatility who want voting rights in company decisions. Common Stock also fits younger investors with smaller budgets, since share prices are typically lower than preferred shares.

When to Use Preferred Stock

Choose Preferred Stock when you need reliable, fixed dividend income and want higher claim priority over common shareholders during liquidation. It suits retirees or conservative investors who cannot tolerate dividend cuts. Preferred Stock also works when you want bond-like stability with equity-like returns, accepting no voting rights in exchange.

Common Misconceptions About Common Stock and Preferred Stock

Common Myth	The Reality
Preferred stock always pays a higher dividend than common stock.	Preferred stock offers a fixed dividend, but common stock dividends can exceed preferred payouts during high-profit years.
Common stock owners have no say in company decisions.	Common stock grants voting rights on board elections and major corporate policies, unlike preferred stock.
Preferred stock is safer than bonds because it is guaranteed.	Preferred stock dividends are not contractual obligations; the company can suspend them without triggering bankruptcy.
All preferred stock is convertible into common stock.	Convertible preferred stock is one variant; most preferred shares remain non-convertible and stay as preferred forever.
Common stock dividends are fixed and predictable each quarter.	Common stock dividends vary with company profits and board discretion; they can be cut or eliminated anytime.
Preferred stock never increases in value.	Preferred stock prices rise when interest rates fall, just as bond prices rise, offering capital gains potential.
Preferred stockholders get paid before bondholders in liquidation.	Bondholders and secured creditors receive payment first; preferred stock ranks above common stock but below all debt.
Common stock is always riskier than preferred stock.	Common stock carries higher volatility, but preferred stock faces interest-rate risk and call risk that common stock avoids.
Preferred stock dividends are tax-deductible for the issuing company.	Preferred stock dividends are paid from after-tax profits, unlike bond interest which is tax-deductible for the issuer.
Common stock voting rights let you influence daily operations.	Common stock voting covers annual meetings and major mergers, but not routine management decisions or hiring.
Preferred stock is a type of debt instrument.	Preferred stock is equity on the balance sheet, not debt; it carries no maturity date and no repayment obligation.
You cannot lose money with preferred stock because dividends are fixed.	Preferred stock prices fall when interest rates rise, and companies can suspend dividends, causing real losses.
Common stock always outperforms preferred stock over time.	Preferred stock can outperform common stock during rising-rate environments or when the issuing company faces earnings pressure.
Preferred stockholders can force the company to pay skipped dividends.	Only cumulative preferred stock accumulates missed dividends; non-cumulative preferred stock simply forfeits them permanently.
Common stock is only for long-term investors, not for trading.	Common stock is actively traded daily on exchanges; preferred stock often has thinner volume and wider spreads.
Preferred stock always has a higher credit rating than common stock.	Preferred stock is unsecured and subordinate to all debt, so rating agencies typically rate it below the company's bonds.
Companies issue preferred stock to raise money without any downside.	Preferred stock carries a fixed dividend burden that common stock does not, creating a perpetual cash obligation.
Common stock gives you ownership, but preferred stock does not.	Both common stock and preferred stock represent equity ownership; preferred stock simply lacks voting rights and has priority claims.
Preferred stock dividends grow with company inflation.	Most preferred stock pays a fixed rate; only rare participating preferred shares adjust dividends based on common stock payouts.
You must hold common stock for a year to qualify for dividend tax rates.	Qualified dividend tax rates apply to both common and preferred stock if held over 60 days during the 121-day period.
Preferred stock is always callable, so you will get your money back early.	Callable preferred stock is common, but non-callable preferred stock exists and cannot be redeemed by the issuer.
Common stock has no claim on company assets if the firm fails.	Common stock has a residual claim on assets after all creditors and preferred stockholders are paid in liquidation.
Preferred stock is ideal for aggressive growth investors.	Preferred stock suits income-focused investors; common stock offers the growth potential that aggressive investors typically seek.
Companies must pay preferred dividends before any common dividends.	Companies must pay preferred dividends before common dividends, but they can skip both if cash flow is insufficient.
Common stock and preferred stock trade at the same price for the same company.	Common stock and preferred stock trade at different prices; preferred stock often trades near par value while common stock fluctuates widely.
Preferred stock always pays dividends quarterly without exception.	Preferred stock dividends are paid at the board's discretion; the company can suspend them during financial distress.
Common stock is not suitable for generating passive income.	Common stock from dividend-paying companies like utilities or consumer staples can generate reliable passive income streams.
Preferred stock is only issued by struggling companies.	Banks, insurance firms, and utilities issue preferred stock routinely to meet regulatory capital requirements and manage leverage.
Common stock gives you a guaranteed return if the company profits.	Common stock returns depend on market prices and dividend policy; profitability does not guarantee any shareholder payout.
Preferred stock is easier to sell quickly than common stock.	Common stock has deeper liquidity and tighter bid-ask spreads; preferred stock often trades infrequently and is harder to exit.

Conclusion

Difference Between Common Stock and Preferred Stock comes down to voting rights versus income stability. Common stock offers ownership and voting power, but dividends fluctuate. Preferred stock provides fixed dividends and priority in liquidation, yet lacks voting rights. Choose common stock for growth and influence. Choose preferred stock for predictable income and safety.

FAQs on Difference Between Common Stock and Preferred Stock

What is the main difference between common stock and preferred stock?: The main difference is that common stock gives voting rights and variable dividends, while preferred stock offers no voting rights but pays fixed dividends with higher claim priority on assets.
Which is better, common stock or preferred stock?: Neither is universally better; common stock suits growth investors seeking capital appreciation and voting power, whereas preferred stock fits income-focused investors who prioritize stable, predictable dividend payments.
Does preferred stock cost more than common stock?: Preferred stock often trades at a higher price per share than common stock because its fixed dividend payments create bond-like stability that investors pay a premium for.
Is preferred stock safer than common stock?: Preferred stock is generally safer because preferred shareholders receive dividends and asset payouts before common shareholders during bankruptcy, though preferred stock still carries more risk than corporate bonds.
Are common stock and preferred stock interchangeable?: Common stock and preferred stock are not interchangeable because they grant different rights, with common offering voting power and preferred offering fixed income, so each serves a distinct investor need.
Can I switch from common stock to preferred stock?: You can switch from common stock to preferred stock only by selling your common shares and buying preferred shares on the open market, as companies rarely offer direct conversion between the two types.
Do preferred shareholders get voting rights like common shareholders?: Preferred shareholders typically do not get voting rights, but they may gain limited voting ability on specific matters like mergers or dividend suspensions if the company misses preferred dividend payments.
What is a common beginner mistake with common and preferred stock?: A common beginner mistake is assuming preferred stock always outperforms common stock, when in reality common stock often delivers higher long-term returns through capital gains that preferred stock lacks.
Why would a company issue preferred stock instead of common stock?: A company issues preferred stock instead of common stock to raise capital without diluting existing shareholders' voting control, while attracting investors who want steady dividends rather than ownership influence.
What happens to common and preferred stock when a company goes bankrupt?: When a company goes bankrupt, preferred shareholders get paid from remaining assets before common shareholders, but both typically lose their entire investment if liabilities exceed available assets.