Preferred vs. Common Stock: Key Differences and Voting Rights

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Can preferred stockholders vote? Usually not. Preferred stock typically carries no right to vote for the board of directors or on routine corporate matters, while common stock usually carries one vote per share. Preferred holders get something else in exchange: they are paid dividends before common holders and rank ahead of them if the company is liquidated. That default has exceptions. The terms of a specific preferred issue, state corporate law, or a private company’s financing documents can give preferred holders a vote in defined situations.

When Preferred Stockholders Can Vote

Voting power comes from the share’s governing documents (the corporate charter and the certificate of designation for that series) and from the corporate law of the state where the company is incorporated. Four situations can give preferred holders a voice:

• Missed dividends. An issue’s terms can grant contingent voting rights if dividends go unpaid for a specified number of periods. Typically this lets preferred holders elect a limited number of directors until the arrears are cleared.
• Changes to their own rights. Under Delaware law, for example, holders of a class of stock generally get a separate class vote on charter amendments that would adversely alter that class’s powers, preferences or special rights.
• Voting preferred by design. Some issues are created with full or partial voting rights from the start. The terms of the specific series decide this, not the label “preferred.”
• Private and venture-backed companies. Series A and later preferred shares sold to investors often vote alongside common stock on an as-converted basis. They also come with protective provisions that require preferred approval for actions such as issuing senior shares or selling the company.

The reverse exception also exists. Common stock does not always vote equally or at all. Some companies issue several common share classes with different voting power. Alphabet’s structure is a familiar case, covered in GOOG vs. GOOGL. To know what any share actually lets you vote on, read the description of capital stock in the company’s filings or prospectus.

What Is Preferred Stock?

Preferred stock is a security with features of both stocks and bonds. It represents ownership and trades on an exchange, but its dividend is set when the stock is issued. That gives holders a more predictable income stream than common stock provides.

Bond-like Features

Preferred shares have a par value, and the dividend rate is applied to it. Because the payment is fixed, the market price moves with interest rates the way a bond’s price does: when rates rise, existing preferred shares become less attractive and their prices fall, and when rates fall, their prices rise. Preferred prices are normally less volatile than common stock prices.

Many preferreds are also callable. After a predetermined date, the issuer can redeem the shares at a stated redemption price. The redemption price can be above what an investor paid, and the market often prices in an expected call. A call also ends the income stream, usually when rates have dropped and reinvesting at the same yield is harder.

Dividends

Preferred dividends must be paid before any common dividend. On cumulative preferred, a missed payment becomes arrears that the company must pay in full before common holders receive anything. On non-cumulative preferred, a skipped payment is simply lost. Preferred dividends are usually higher than common dividends.

Types of Preferred Stock

Perpetual preferred has no maturity date and pays its fixed dividend indefinitely, unless the issuer calls it. Convertible preferred lets the holder exchange preferred shares for a set number of common shares. That adds some of common stock’s upside to the preferred’s income and priority.

What Is Common Stock?

Common stock represents ownership in a corporation and a claim on its profits. Most stock is issued in this form, and its price is set by supply and demand in the market.

Voting. Common holders usually receive one vote per share. They elect the board of directors and may also vote on matters such as mergers, acquisitions and stock splits. A small holder’s influence is limited in practice.

Dividends. The board decides whether to pay common dividends and how much. They are never guaranteed, and many companies pay none at all.

Growth. Common stock has no fixed ceiling on its value. If the company does well, the share price can rise substantially. If it does poorly, the price can fall, and in an insolvency common holders are last in line for whatever assets remain. Evaluating that upside is the work of fundamental analysis.

Preferred Stock vs. Common Stock: Key Differences

Example of Preferred Stock and Common Stock

Take a hypothetical company with both share types outstanding. Its preferred stock has a $25 par value and a 6% cumulative dividend rate, so each share pays 6% × $25 = $1.50 a year. If the preferred trades at $24, the yield to a buyer at that price is $1.50 ÷ $24 = 6.25%. If the price rises to $26, the yield falls to about 5.77%. The dollar payment is unchanged.

Suppose the company skips one full year of preferred dividends. On a cumulative issue, it owes $1.50 per preferred share in arrears. That plus the current year’s $1.50 means $3.00 per preferred share must be paid before common holders receive any dividend. If the issue’s terms grant voting rights after a set number of missed payments, preferred holders may now help elect directors.

Now assume the company is liquidated. Creditors and bondholders are paid first. Preferred holders then receive their liquidation preference, commonly par value plus any unpaid dividends, as the terms specify. Common holders get whatever is left, which may be nothing. If the company instead triples its earnings, the preferred still pays $1.50 a year, while the common shares capture the gain.

Preferred Stock vs. Common Stock in Practice

No share type is better in general. The choice depends on what you need the investment to do:

• You want periodic income. Preferred stock’s set dividend and payment priority fit that goal better than a common dividend the board can cut or never start.
• You want a say in the company. Only common stock, or voting preferred where it exists, gives you a vote on directors and major decisions.
• You want long-term growth. Common stock’s price can rise with the business. A preferred’s price stays tied mostly to its yield and prevailing rates, and a call can cap it further.
• You have low tolerance for price swings. Preferred stock’s lower volatility and senior claim in liquidation make it the more comfortable holding for many investors, though not a risk-free one.

The Risks

Preferred stock is generally less risky than common stock, but it still carries real risks:

• Interest rate risk. Rising rates push preferred prices down, and perpetual issues have no maturity to pull the price back to par.
• Credit risk. Preferred ranks below all debt. A company in distress can suspend preferred dividends, and non-cumulative holders may never recover them.
• Inflation risk. A fixed-rate dividend does not adjust for inflation, and higher inflation tends to bring higher rates, which lower preferred prices. Compare the yield with the U.S. inflation rate by year to judge the real return.
• Liquidity risk. Some preferred issues trade thinly and can be harder to sell at a fair price.

Common stock’s main risk is price loss. The share price can fall sharply or go to zero, dividends can disappear, and holders recover last in a bankruptcy.

FAQs

The Bottom Line

Investors choosing between share types should match the stock to their goal. Preferred stock suits those who want steady income, payment priority and lower price swings, though rates, credit and inflation still pose risks. Common stock suits those who want growth and a vote on directors. Because voting and dividend rights vary by issue, read the description of capital stock in the company's filings before buying.