Common Stock vs. Preferred Stock | Harvard Business Services, Inc.

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The Difference Between Common and Preferred Stock

Common stock and preferred stock are some of the most frequently used types of stock in many of the largest companies in the world. Each represents a share of ownership in a company, but they have a few differences that distinguish their use cases.

What is Common Stock?

Common stock is the most basic type of ownership in a company. When you buy common stock, you’re purchasing a share of the business and becoming a partial owner. This ownership typically comes with voting rights, allowing shareholders to vote on key corporate decisions such as electing the board of directors.

Residual claim - Common stockholders have the last claim on the company's assets and earnings after all creditors and preferred stockholders are paid.
Dividends - Common stock dividends are not guaranteed and are determined by the company's profitability.
Voting rights - Common stockholders typically have voting rights in company matters, allowing them to participate in decisions.

What is Preferred Stock?

Like common stock, preferred stock represents an equity stake in the business. However, preferred shareholders typically receive fixed dividends, which are paid out before any dividends are distributed to common stockholders. However, unlike common stock, preferred stock usually does not come with voting rights, so shareholders have limited influence over company decisions.

Earning Priority - Preferred shareholders have a higher claim on the company's assets and earnings. They receive dividends before common stockholders.
Fixed dividend - Preferred stockholders typically receive a fixed dividend, similar to a bond interest payment.
No voting rights - Generally, preferred stockholders do not have voting rights in company matters.

Comparison Table

If you’re trying to decide which type of stock is best for your company, this is a great place to start. The table below highlights the key differences between common stock and preferred stock. Use it as a quick reference to compare shareholder rights, dividend treatment, risk, and how each type of stock is typically used by companies.

	Common Stock	Preferred Stock
Ownership	Represents ownership in the company and is the most common type of stock issued.	Also represents ownership, but with added financial preferences over common stock.
Voting Rights	Typically includes voting rights, often one vote per share.	Usually does not include voting rights. Some preferred shares may have limited voting rights.
Dividends	Dividends are paid after preferred shareholders, but they are not guaranteed and can vary.	Often pays fixed dividends on a predictable schedule.
Risk Level	Higher risk because common shareholders are last in line for payouts.	Lower risk than common stock because preferred shareholders have priority in certain payouts.

Shareholder Voting Rights

One of the key differences between common and preferred stock is the difference in voting rights between the two parties. Common stockholders typically have the right to vote on important corporate matters, and each share of common stock equals one vote, giving shareholders a direct voice in how the company is managed. Preferred stockholders, on the other hand, usually do not have standard voting rights. Instead, preferred shares are designed to provide financial benefits, such as fixed dividends and priority during liquidation. However, there are exceptions.

Nevertheless, stock voting rights vary from company to company, and their terms are open and limited only by what the Board of Directors negotiates. It can be structured to offer the investors preferential financial assurances without giving them voting rights.

Dividends & Shareholder Earnings

Another big difference between these two types of stock is how they earn returns. Common stockholders primarily benefit through stock price appreciation, meaning their shares can increase in value as the company grows. They may also receive dividends, but these payments are not guaranteed and can fluctuate based on the company's financial performance.

Preferred stockholders are typically focused on consistent income rather than long-term growth. Most preferred shares pay fixed dividends at regular intervals. These dividends are usually paid before any dividends are distributed to common shareholders, giving preferred investors greater income stability.

What Happens in a Sale or Bankruptcy?

When a company is sold or goes bankrupt, preferred stockholders have priority over common stockholders when it comes to receiving payouts. This means preferred investors are paid first (after creditors and debt holders have been repaid).

Meanwhile, common stockholders are often last in line during a liquidation event. If there are remaining assets after debts and preferred shareholder obligations are paid, common shareholders may receive a portion of the proceeds. However, in bankruptcy situations, there is often little or no money left for them.

Risk for Shareholders

Common stock is generally considered riskier because its value is closely tied to the company’s performance and market conditions. Share prices can rise significantly, but they can also decline sharply during economic downturns or periods of poor company performance. As mentioned above, common shareholders are also last in line for liquidation payouts, increasing their financial risk.

Preferred stock is typically viewed as more stable. Preferred shareholders usually receive fixed dividend payments and have priority over common shareholders if the company faces financial trouble. This added protection can make preferred stock appealing to income-focused investors seeking more predictable returns.

However, lower risk often comes with lower growth potential. Preferred stock prices tend to fluctuate less, meaning investors may miss out on the large capital gains that common stocks may enjoy. As a result, common stock is often favored for growth, while preferred stock is preferred for income and stability.

Common Stock vs. Preferred Stock: Which to Choose

Common stock is often used for founders, employees, and public shareholders because it typically includes voting rights and long-term growth potential. Issuing common stock can help align stakeholders with the company’s future success, but it may also dilute ownership and decision-making power over time.

Meanwhile, preferred stock is commonly used when raising capital from outside investors, especially venture capital firms. Because preferred shares usually do not carry the same voting rights as common stock, owners may be able to secure funding while retaining greater control of the company. However, since preferred investors often receive financial protections such as fixed dividends or liquidation preferences, this can reduce the amount common shareholders receive in a sale or bankruptcy.

Corporations can increase the number of common shares and preferred shares available at any time with a stock amendment. Our team can help with this process once you know how many shares you’d like to authorize and what the new par value will be.

Common Stock & Preferred Stock FAQs

Can a company issue both types of stock?

Yes, many companies issue both common and preferred stock, as each serves a different purpose. Common stock is typically held by founders, employees, and public investors, while preferred stock is often issued to institutional investors like venture capitalists. By offering both, companies can raise capital while balancing control and financial obligations.

Why do companies issue preferred stock?

Companies issue preferred stock to raise capital without giving up as much control. Since preferred shareholders usually don’t have voting rights, existing owners can avoid diluting their decision-making power. Preferred stock is also attractive to investors because it often includes fixed dividends and priority in payouts.

What happens to shareholders if a company goes bankrupt?

If a company goes bankrupt, its assets are distributed in a specific order. Creditors and debt holders are paid first, followed by preferred shareholders, and then common shareholders last. This means preferred stockholders have a higher claim on the company’s remaining assets than common stockholders.