Common vs Preferred Stock

Common stock votes and rides the upside; preferred stock pays a fixed dividend and ranks ahead on payouts but rarely votes.

How investors use it

Choose common for growth and votes, preferred for income and seniority. Check the preferred’s dividend and whether it is cumulative (unpaid dividends accrue) before buying; and remember preferred price risk is still real.

Worked example

A real-world scenario

A bank issues preferred stock paying a 6% fixed dividend. In a calm year, holders collect their payments while common shareholders ride the earnings. When the bank hits trouble, it suspends the common dividend but keeps paying preferred — and if the worst happens, preferred holders get repaid from the liquidation before common holders see a cent. The scenario is the hierarchy in action: preferred is the senior, steadier claim, and common is the equity that takes the last risk and the last reward.

Common confusion

Preferred can still fall in price; “preferred” means senior, not safe.

Why it matters

It lets issuers raise cash while giving some investors steady preference.

Key takeaway

Common and preferred stock are two classes of ownership with different rights: common votes and rides the full upside, preferred pays a fixed dividend and ranks ahead but rarely votes. Preferred is senior to common but riskier than bonds, and it can still fall with the company. Choose common for growth and votes, preferred for income and priority, and check whether the dividend is cumulative before buying. “Preferred” means senior, not safe.

Definitions reviewed by the Investing Glossary editorial team.