Preferred Stock vs. Common Stock: The Complete Guide

Preferred shares often trade at a lower price than common shares of the same company, but pay a more generous dividend — here is why.

What is preferred stock?

Preferred stock gives shareholders priority over common stockholders when it comes to dividend payments and distribution of assets if the company is liquidated, but in exchange, preferred shares typically carry no voting rights. In many markets, preferred shares are marked with a suffix in the ticker or company name to distinguish them from common shares.

The key difference from common stock

Common shareholders can vote at shareholder meetings, including on matters like electing the board of directors, but their dividend claim ranks behind preferred shareholders. Preferred shareholders give up that voting power in exchange for a priority (and often fixed or higher) claim on dividends.

Why does preferred stock often trade cheaper? (the price gap)

The percentage difference between a company’s common and preferred share price is often called the "price gap" or valuation spread. Preferred shares are usually issued in smaller volumes and trade far less actively than common shares, and that lower liquidity is a major reason preferred shares tend to trade at a discount.

Why the price gap widens and narrows

When a stock's dividend yield becomes more attractive to income-focused investors, buying pressure on the preferred shares can narrow the price gap. Conversely, unusual market volatility or speculative trading can cause the gap to widen unpredictably. Reliably forecasting which direction the gap will move next is difficult.

Variants like convertible and redeemable preferred stock

Convertible preferred stock carries the right to convert into common shares under specified conditions, while redeemable (callable) preferred stock can be bought back by the issuing company at a set price after a certain date. Even shares that are all technically “preferred stock” can carry very different terms depending on how they were issued.

What to watch out for

Lower trading volume can mean a wider bid-ask spread, making it harder to buy or sell at the price you want, and price swings can be sharper during volatile periods. Before investing, it is worth checking the specific type of preferred stock, its dividend terms, and its recent trading volume through your broker's platform.

Curious about dividend investing?

Preferred stock often draws attention for its dividend appeal. If you want a broader foundation in dividend investing, dividend-focused stock guides on this site are a good next stop.

A general information note

This page is intended for general educational purposes and is not investment advice about any specific security. Always confirm a given company's preferred-share terms and dividend rate through that company's official disclosures and your brokerage's listing information.

Frequently Asked Questions

Does preferred stock always pay a higher dividend?

Preferred stock is often structured, per the company's charter, to receive a higher dividend rate than common stock, but this is not universal — dividend terms vary by issue. Always check the specific charter and disclosures for an individual security.

Can preferred stock gain voting rights later?

Some preferred shares include a provision that restores voting rights starting the period after the company fails to pay the specified dividend for a set stretch of time. Whether a given issue includes this kind of provision depends on its specific terms.