Common vs. Preferred Stock: Why the Share Type Matters

A brokerage search can show more than one security tied to the same company. Common stock and preferred stock are different forms of ownership, and the rights attached to them matter. A familiar issuer does not make the securities interchangeable.

How do the dividend rights differ?

FINRA explains that a company may pay dividends on common stock, but it is not required to do so. The amount can be reduced or eliminated. Do not treat a past common dividend as a promise of the next payment.

Preferred dividends are paid before common dividends. The actual payment terms belong in the security's documents. Before buying, establish which security you selected and how its income rights differ from the company's common shares. The label preferred should prompt a closer reading, not an assumption of guaranteed income.

What happens if the company fails?

FINRA describes a priority order for financial obligations. Preferred stockholders rank ahead of common stockholders, but behind bondholders. That relative position does not establish how much money, if any, will remain available for a particular investor.

Owning a security higher than another class in the order is therefore different from eliminating loss risk. Review the rights and risks of the actual issue rather than inferring them from the company's brand or the stock's displayed price.

What about different common share classes?

Companies can also issue different classes, often identified by letters. FINRA notes that these can have different prices, voting rights or dividend policies. Some may trade publicly while another class is reserved for founders or management.

Confirm the ticker, share class and security description before submitting an order. Compare the rights you want with the documents for that exact investment. If you cannot explain the difference between two listings, ask the brokerage for clarification. Both common and preferred investments can lose value, including the original amount invested.

Frequently asked questions

Does preferred mean safer in every respect? No. It describes particular rights and priorities, not a complete risk assessment.

Can two classes in the same company have different votes? Yes. FINRA identifies voting rights as one feature that can differ among classes.

Sources and further reading: FINRA, Stocks (https://www.finra.org/investors/investing/investment-products/stocks).