Preferred stock vs common stock: What’s the difference?

What are preferred shares and common shares?

Preferred shares and common shares are two forms of equity that companies issue to raise capital. Both play a role in corporate financing, offering different rights, benefits and risks to the investors who hold them.

Common shares represent broad ownership. Holders usually have voting rights, may receive variable dividends and share in long-term growth. Preferred shares, by contrast, act more like a hybrid of equity and debt. They prioritize dividends and liquidation claims but usually don’t include voting rights.

Companies often issue preferred shares to raise funds without diluting control. Investors buy them for stable income and lower volatility. Common shares remain the default form of stock ownership for those seeking governance rights and growth.

Discover how to buy stocks

Key differences between preferred and common shares

Preferred stock differs from common stock in several areas.

1. Voting rights: Common shareholders often vote in corporate elections; preferred shareholders typically can’t.
2. Dividends: Common dividends are variable and not guaranteed, while preferred dividends are fixed, paid first and sometimes cumulative.
3. Liquidation priority: Preferred stock ranks above common in bankruptcy but still below bonds.
4. Special features: Some preferred shares are convertible into common stock and many are callable, meaning issuers can repurchase them.
5. Market behavior: Common stock tends to be volatile and growth-oriented. Preferred stock is steadier, trading more like bonds.

Learn how to invest in stocks

Pros and cons of preferred shares vs common shares

Advantages of common shares

• Common stockholders enjoy voting rights that give them a say in corporate elections and key matters.
• Their shares provide the greatest potential for long-term capital growth as companies expand and increase in value.
• Many common shares are widely traded on major exchanges, making them liquid and relatively easy to buy or sell.

Disadvantages of common shares

• The potential for growth comes with higher risk, as share prices can fluctuate sharply with market sentiment and earnings results.
• Dividends on common stock are not guaranteed and may be reduced or suspended at any time.
• In the event of liquidation, common shareholders are last to be repaid after creditors and preferred stockholders.

Advantages of preferred shares

• Preferred stockholders receive fixed dividends that are paid before common dividends, creating a steadier income stream.
• They hold priority over common shareholders in liquidation, which increases the likelihood of repayment if the company fails.
• Preferred shares are often less volatile than common shares, making them appealing to income-focused investors and institutions.

Disadvantages of preferred shares

• Preferred shareholders usually give up voting rights and therefore have little influence over company decisions.
• They face limited price appreciation compared to common shares, as preferred stock may behave more like a bond.
• Callable features allow companies to repurchase preferred shares, which can cap investor returns.
• Sensitivity to interest rates means preferred share values often decline when market yields rise.

Explore our stocks Learn Hub

Where they appear on the balance sheet

Both types of stock are recorded under shareholders’ equity, but they’re treated differently.

Common stock is listed as paid-in capital, along with additional paid-in capital and retained earnings. Dividends, if declared, reduce retained earnings but remain discretionary.

Preferred stock also appears under paid-in capital, yet it behaves more like debt. Fixed dividends are obligations and may be recorded as liabilities until paid. Credit rating agencies often classify preferred stock as ‘equity-like debt’ because its payouts resemble bond coupons.

This distinction matters for both corporate financing and investor analysis. Common stock strengthens ownership structures, while preferred stock creates predictable obligations that affect balance sheet risk.

How investors use common and preferred stock

The role of common vs preferred stock often varies based on how investors view growth, income and risk.

Growth focus

Common shares are generally associated with long-term appreciation. Because their prices move with earnings and market sentiment, they are often linked to portfolios that emphasize growth potential, though this also introduces more volatility.

Income focus

Preferred shares are commonly linked to steady dividends and potentially lower price swings. Their fixed payouts and higher claim in liquidation make them attractive to those who prioritize stability and predictable income streams.

Blended approach

Some portfolios include both. Common stock can provide exposure to growth, while preferred stock may offer more stable returns. Institutions such as banks and pension funds frequently hold preferred shares, while retail investors more often hold common shares.

Ready to invest?

1. Sign up to Crypto.com and create a Crypto.com Stocks account.
2. Explore over 10,000+ stocks
3. Buy your shares

FAQs about preferred vs common shares

Do preferred shares have voting rights?

Usually no. Common stockholders often vote in elections and corporate matters, but preferred stockholders typically don’t.

Do preferred stocks pay dividends?

Yes. Preferred stock dividends are usually fixed, paid before common dividends, and sometimes cumulative.

Can preferred stock be converted to common stock?

Some preferred shares are convertible. Holders can exchange them for common stock under pre-set terms.

What are callable preferred shares?

Callable preferred stock gives the issuing company the right to repurchase the shares at a fixed price after a certain date. This limits upside for investors if rates fall.

Is preferred stock safer than common stock?

Preferred stock has priority in dividends and liquidation, making it more predictable than common. But it’s still equity, and prices fluctuate with interest rates and issuer risk.

Why do companies issue preferred stock?

Often to raise capital without diluting voting control. Preferred shares also appeal to institutional investors seeking income instruments.

This is informational content sponsored by Crypto.com and should not be considered as investment advice.

Foris Capital US LLC (“FCUL” or referred to herein as “Crypto.com Stocks”) is a broker-dealer registered with the U.S. Securities and Exchange Commission (SEC) and a Member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). For further information about FCUL, please visit FINRA BrokerCheck.  

FCUL is a subsidiary of Crypto.com. FCUL is a separate entity from Crypto.com, Foris DAX, Inc., and other affiliated Foris companies. FCUL does not engage in the sale, transfer or custody of crypto currencies or digital assets. Crypto.com is a separate entity from FCUL and does not engage in the securities business. Customer balances and crypto holdings held and transacted at Crypto.com and other entities outside of FCUL are not covered by SIPC insurance and are separate from securities transactions and holdings at FCUL.

All investments involve risk, and not all risks are suitable for every investor. The value of securities may fluctuate and as a result, clients may lose more than their original investment. The past performance of a security, or financial product does not guarantee future results or returns. Keep in mind that while diversification may help spread risk, it does not assure a profit or protect against loss in a down market. There is always the potential of losing money when you invest in securities or other financial products. Investors should consider their investment objectives and risks carefully before investing.