TradingKey - Stocks can be categorized based on their characteristics and ownership-related rights. Selecting the appropriate stock type is the first step toward investment success.
You’ve likely heard of "common stock" and "preferred stock," but what exactly are the differences? Which one is more suitable for you as a novice investor?
What is Common Stock?
If you’re interested in stock investment, "common stock" is a topic you can’t avoid. It’s the most prevalent stock type in the market and a core tool for corporate financing.
Common stock serves as a basic equity security, usually issued when a company conducts its initial public offering (IPO). Holding common stock means you become one of the company’s small bosses, gaining claims to its assets and earnings. You can share in the company’s profits through dividends and capital appreciation.
However, note this:
Common stockholders rank at the very bottom of the priority sequence during company liquidation.
This means only after all debt holders, bondholders, and preferred stockholders receive compensation can common stockholders claim remaining assets.
What Are the Three Core Advantages and Risk Pitfalls of Common Stock?
- Voting Rights
Common stock grants shareholders substantial voting rights, with each share typically representing one vote, allowing you to directly participate in major company decisions.
For example, shareholders can vote on electing board members, approving mergers and acquisitions, or even supporting or opposing equity incentive plans.
This "ownership premium" not only positions you as a financial supporter but also provides an opportunity to engage in corporate governance. This right is particularly valuable for long-term value investors.
- Variable Dividends
Dividends from common stocks are not guaranteed like those from fixed-income products. The decision to declare dividends and the specific amounts are entirely dependent on the company’s financial health and the board’s resolutions.
During periods of strong profitability, companies may distribute dividends to shareholders.
However, if company performance declines or if the board decides to reinvest profits, shareholders may find themselves unable to receive dividends.
- High Liquidity
These stocks typically provide high liquidity, particularly those belonging to large publicly traded firms.
They can be easily bought and sold on stock exchanges, providing investors with flexibility for quick position building or liquidation.
- Risk and Return Potential
Investing in common stocks comes with high risk but also significant return potential. Their worth is shaped by market trends, economic factors, company performance, and competitive dynamics within the industry.
If market conditions worsen or if a company's operations falter, stock prices may plummet, leading to substantial losses for investors.
What is Preferred Stock?
Preferred stock is a special equity instrument that, as the name implies, enjoys certain "preferential rights." These include dividend priority and liquidation preference.
Preferred stocks possess characteristics of both stocks and bonds. They are not as volatile as common stocks, nor do they offer fixed returns like bonds.
If you are looking for an investment tool that provides stable income without taking on excessive risk, "preferred stock" may be a good choice.
However, preferred shareholders typically have no or only limited voting rights, meaning you cannot participate in the company's day-to-day decision-making.
Additionally, prices of preferred stocks are relatively stable and exhibit lower volatility, making them suitable for investors seeking steady returns without interest in controlling the company.
What Are the Features of Preferred Stock?
- Dividend Priority
Dividends from preferred stocks are strictly paid before those of common stocks and usually come with a fixed rate (e.g., 4%-8% of face value).
This fixed payment structure makes them more akin to “bond-like” investment tools, offering predictable cash flow.
For example, JPMorgan Chase (NYSE: JPM) issued preferred stock with a 6.5% dividend rate in Q1 2025; amid expectations of Fed rate cuts, its dividend premium rose from 1.8% in 2024 to 2.5%.
In contrast, Apple (NASDAQ: AAPL) experienced increased uncertainty regarding common stock dividends due to supply chain disruptions; by Q2 2025, the probability of dividend payout had fallen to 60%.
- Limited Voting Rights
In most cases, preferred shareholders do not have voting rights in daily corporate decisions.
They may only be granted voting rights under specific circumstances (for example, during significant restructurings or changes in terms).
This design is intended to keep preferred shareholders focused on obtaining stable income rather than participating in corporate governance.
- Redeemable and Buyable Features
Many preferred stocks come with redemption clauses that allow issuing companies to redeem or buy back shares at a predetermined price after a specified period.
These provisions provide companies with flexibility in managing their capital structure but can introduce uncertainty regarding investment duration for investors.
- Risk-Return Characteristics: Downside Protection and Upside Limitations
The risks associated with preferred stocks are indeed lower than those of common stocks because their dividend priority and liquidation preference provide "downside protection." Even amid significant market fluctuations, your principal and returns tend to be more secure.
However, the return potential for preferred stocks is also relatively limited. Because dividends are typically fixed, price appreciation for preferred stocks usually does not match that of common stocks.
In other words, the value of preferred shares primarily depends on fixed dividends and redemption prices rather than significant fluctuations in share prices.
- Convertibility
Some preferred shares embed conversion options that create a “dual-track yield channel” between equity and debt — usually under specific conditions or within designated time frames.
This provides investors with the opportunity to convert into common stock for potentially higher returns when company shares rise.
What Are the Main Classifications of Preferred Stock?
- By Dividend Accumulation
Preferred stocks are designed with great flexibility, and different types come with varying investment experiences. They can be classified based on core rights features as follows:
Cumulative Preferred Stock
The hallmark of cumulative preferred stock is that "debts must be repaid."
If a company fails to pay dividends in a given year due to poor earnings, the unpaid amounts will accumulate.
When the company's financial condition improves, it must first pay these accumulated dividends along with the current year's dividends to preferred shareholders before any distributions can be made to common shareholders.
Non-Cumulative Preferred Stock
In contrast, non-cumulative preferred stock operates differently; if the company does not have sufficient profits in a given year to pay dividends, there will be no future compensation for those unpaid amounts.
Shareholders of this type of preferred stock can only receive dividends for the current year and have no claim to past unpaid dividends.
For example, Meta (NASDAQ: META) issued 5.5% non-cumulative preferred stock in 2024, stipulating that "dividends may not be paid in loss years."
- By Right to Participate in Residual Profits
Participating Preferred Stock
Holders of participating preferred stock not only receive fixed dividends but also share in excess profits when they are distributed alongside common shareholders.
Depending on the degree of participation, this type can further be divided into full participation and partial participation. The former allows equal distribution of surplus profits with common shareholders, while the latter only permits proportional participation.
For instance, Goldman Sachs (NYSE: GS) issued partially participating preferred stock in 2025 that entitles holders to only 50% of ordinary common stock dividends.
Non-Participating Preferred Stock
Preferred shareholders can only receive dividends at a fixed rate and cannot partake in excess profit distribution even during prosperous times.
A typical case is Apple's (NASDAQ: AAPL) 4.25% non-participating preferred stock issued in 2024, which clearly states "will not participate in remaining cash distributions from buyback plans."
- By Convertibility into Common Stocks
Convertible Preferred Stock
Convertible preferred stocks grant you a unique right; under specific conditions, you can convert them into a predetermined number of common shares.
Once conversion is successful, you transition from being a preferred shareholder to becoming a common shareholder eligible for involvement in company decision-making and profit distribution.
Non-Convertible Preferred Stock
Non-convertible preferred stocks lack this flexibility; you simply continue receiving fixed dividends according to the terms without being able to convert them into common shares.
- By Redeemability
Callable Preferred Stock
Callable preferred stocks allow issuing companies to redeem issued shares at an agreed price after a certain timeframe.
This feature provides companies with flexibility regarding capital structure adjustments, but may create uncertainty regarding your investment duration.
Non-Callable Preferred Stock
On the other hand, non-callable preferred stocks do not possess such restrictions. Unless under special circumstances like company liquidation, issuing companies cannot redeem your shares.
This means you can hold onto these investments long-term while continuously enjoying fixed dividends and preferential rights.
- By Dividend Rate Pricing
Fixed Dividend Rate Preferred Stock
Fixed-rate preferred stocks have their dividend rates predetermined at issuance; therefore, regardless of changes in market interest rates, your returns remain unaffected.
Floating Dividend Rate Preferred Stock
Floating-rate preferred stocks adjust their dividend rates based on changes in benchmark interest rates (such as LIBOR or government bond yields).
This design helps mitigate risks associated with inflation or rising interest rates but may also lead to yield volatility.
Do You Know the Core Differences Between Common and Preferred Stock?
Features | Common Stock | Preferred Stock |
Income Characteristics | Less predictable; High potential for appreciation | More predictable; Limited High potential for appreciation |
Voting Rights | Yes | (Mostly)No |
Risk | High | Low |
Purpose of Issuance | Raise capital, disperse ownership | Adjust the capital structure |
Asset Allocation | After debtholders and preferred stockholders | After debtholders |
In summary, both common stocks and preferred stocks have unique characteristics and serve different purposes in the financial market. When deciding between the two, investors should carefully evaluate their risk tolerance, investment objectives, and return expectations.
