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What are the different types of Stocks (common vs. preferred)?

Common vs. Preferred Stock: An Investor's Guide to Knowing the Difference

So, you’ve decided to dip your toes into the Stock Market. You’re excited about the potential for growth and the idea of owning a small piece of a company you believe in. But as you start your research, you quickly encounter terms like "common Stock" and "preferred Stock."

Aren’t all Stocks the same? Far from it.

Understanding the difference between these two main types of Stock is fundamental for any investor. Choosing one over the other (or a mix of both) depends entirely on your financial goals and your appetite for risk.

Let’s break down what common and preferred Stock are, and how they stack up against each other.

Common Stock: The Everyday Investor's Choice

When people talk about "buying stocks," they are almost always referring to common stock. This is the most prevalent type of equity and represents true ownership in a corporation.

Key Characteristics of Common Stock:
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  • Voting Rights: This is a major feature. Owners of common stock typically get a vote in corporate decisions, such as electing the board of directors or approving major company policies. Your voting power is usually proportional to the number of shares you own (one share, one vote).
  • Capital Appreciation: The primary goal for most common stockholders is price appreciation. You buy a share at $50, hoping it will be worth $100 someday. This is where the potentially massive returns come from.
  • Dividends: Common stockholders may receive dividends, but these are not guaranteed. The company’s board of directors decides whether to pay a dividend and how much. In tough times, dividends for common shareholders are often the first thing to be cut.

​The Big Risk: Common stockholders are at the bottom of the corporate ladder when it comes to claims on assets. If a company goes bankrupt and is liquidated, common stockholders are the last in line to get paid—after creditors, bondholders, and preferred shareholders. There’s a very real chance they could get nothing.

In a nutshell: Common stock offers higher growth potential and a voice in the company, but it comes with higher risk, especially during downturns.
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Preferred Stock: The "Bond-Like" Hybrid

Preferred stock is often described as a hybrid security because it blends characteristics of both stocks and bonds. It’s generally geared towards investors seeking steady, predictable income.

Key Characteristics of Preferred Stock:
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  • Priority Dividends: This is the #1 advantage. Preferred shareholders have a higher claim on dividends than common shareholders. They receive a fixed, regular dividend, which is much more reliable. If a company can only pay dividends to one group, it must pay preferred shareholders first.
  • Priority in Liquidation: If the company goes bankrupt, preferred shareholders stand in line ahead of common stockholders (though still behind debt holders) to recoup their investment.
  • No Voting Rights: In exchange for this added safety and priority, preferred shareholders usually do not get voting rights.
  • Fixed Income: The dividend for preferred stock is typically fixed. While this provides stability, it also means preferred shareholders don’t benefit from dividend increases if the company performs exceptionally well. Their upside is capped.

Other Features to Know:
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  • Cumulative Dividends: Many preferred stocks are "cumulative." If a company suspends its dividend, it must pay all accumulated, missed dividends to preferred shareholders before any dividends can be paid to common shareholders.
  • Callable: Companies can often "call" (buy back) preferred shares after a certain date at a predetermined price. This allows them to refinance if interest rates fall.

In a nutshell: Preferred stock offers less risk, stable and predictable income, and priority in payouts, but it comes with limited growth potential and no say in company matters.

Which One is Right for Your Portfolio?

There’s no single "right" answer. Your choice depends on your investment strategy:
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  • Choose Common Stock if: You are investing for the long term, are comfortable with market volatility, believe in a company’s growth story, and want a chance to participate in its success (both through share price and potential dividend growth).
  • Choose Preferred Stock if: Your primary goal is generating a steady stream of income with less volatility. You are more risk-averse and are willing to sacrifice growth potential and voting rights for the safety of priority dividends.

Many investors don't choose at all - they hold both. A diversified portfolio might include common stock for growth and preferred stock (or preferred stock ETFs) for stable income, creating a balanced approach to building wealth.