Preferred Stock
Preferred stock is a class of shares that usually pays a fixed dividend and ranks ahead of common stock for dividends and in bankruptcy, but behind bonds. Holders usually have no voting rights, and the price moves less than common stock.
Preferred stock sits between a bond and a common share. Like a bond, it usually pays a fixed income; like a share, it represents ownership and ranks behind the company's lenders. Investors use it for steady income, while companies use it to raise money without adding debt or diluting voting control. This entry explains how preferred stock works, how it compares with common stock and what risks it carries.
- Category
- Trading Basics
- Reading time
- 4 min
- Also called
- Preferred shares, Preference shares, Prefs
- Updated
Preferred stock in plain words
Preferred stock usually pays a fixed dividend, much like the coupon on a bond, which attracts income investors.1
Preferred holders usually cannot vote, but they receive dividends before common shareholders and rank ahead of them if the company is liquidated.2
In a bankruptcy, bondholders are paid first, then preferred holders, and common shareholders last.2
How preferred stock works, step by step
The company issues it
With a stated dividend rate and par value.
Investors buy for income
The fixed dividend is the main attraction. See Dividend Yield.
Dividends come first
Preferred dividends are paid before common dividends.
Price moves with rates
Like bonds, prices tend to fall when rates rise. See Interest Rate.
It may be callable
Many issues can be redeemed by the company at a set price.
Priority in liquidation
Behind bonds, ahead of common stock.
Worked examples
Example 1 — Fixed dividend income
$600 a yearA preferred share with $25 par value pays a 6% dividend. You own 400 shares.
| Dividend per share | $25 × 6% = $1.50 a year |
| Annual income | 400 × $1.50 = $600 |
Preferred stock usually pays a fixed dividend, which makes it attractive for income.1
Example 2 — Limited upside
Steady, not explosiveThe company's common stock rises 40% in a year. Its preferred shares move from $25.00 to $25.50.
| Common stock | +40% |
| Preferred stock | ($25.50 − $25.00) ÷ $25.00 = +2% |
Preferred prices move less than common stock: they lose less in downturns but gain little when the common soars.1
Example 3 — Order of payment in a liquidation
Preferred recovers 67%A failed company has $100m left. It owes $80m to bondholders and $30m of preferred stock.
| Bondholders | $80m paid in full |
| Preferred holders | $20m of $30m |
| Common shareholders | $0 |
Bondholders are paid first, then preferred holders, before anything reaches common shareholders.2
Preferred vs common stock
| Aspect | Preferred | Common |
|---|---|---|
| Dividend | Usually fixed, paid first | Variable, paid after |
| Voting rights | Usually none | Usually yes |
| Price movement | Smaller | Larger |
| Bankruptcy priority | Ahead of common | Last |
Who uses preferred stock
Income investors
Steady dividends above many bond yields.
Banks and utilities
Common issuers raising capital without voting dilution.
Portfolio diversification
A middle ground between bonds and stocks. See Diversification.
Venture financing
Startups often issue preferred shares to investors.
Advantages and disadvantages
Advantages
- Fixed, priority dividends.
- Less volatile than common stock.
- Ranks ahead of common in a bankruptcy.
Disadvantages
- Little upside if the company thrives.
- Usually no voting rights.
- Falls when interest rates rise.
- Ranks behind all bondholders.
Going deeper
Read as far as you need. Each level builds on the one before it.
Two main kinds of stock
Beginner
Rate sensitivity
Intermediate
Because the dividend is fixed, preferred prices behave like long bonds: when market rates rise, existing fixed payments look less attractive and prices fall. See Bond.
Cumulative, callable, convertible
Advanced
Cumulative issues must pay missed dividends before common holders get anything; callable issues can be redeemed early; convertible issues can be swapped for common shares. Read each issue's terms. See Convertible Bonds.
Common mistakes
Treating it like a bond
Preferred dividends can be suspended; bond coupons are obligations.
Ignoring call risk
The best issues are often redeemed early.
Chasing high yields
A very high yield often signals credit risk.
Forgetting rate risk
Rising rates hit long fixed payments.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- Preferred stock usually pays a fixed dividend.
- It ranks ahead of common stock but behind bonds.
- Holders usually cannot vote.
- Its price moves less than common stock.
- Rising rates and call features are key risks.
Frequently asked questions
Is preferred stock safer than common stock?
Can preferred dividends be cut?
Why don't preferred shares rise with the company?
Further learning
- Stock
Common stock basics.
- Bond
The other fixed-income cousin.
- Dividend Yield
How income is measured.
- Interest Rate
Why rates move preferred prices.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- FINRA. Stocks (opens in a new tab) Checked .
- Investor.gov (SEC). Stocks – FAQs (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.