What is Preferred Stock – Features and Benefits Over Common Stock

• Preferred stock is the best option for retirees or conservative investors who prioritise dependability over growth.
   
• It is not suitable for growth-oriented investors seeking long-term capital gains, as holders typically do not have voting rights and experience lower price appreciation compared to common stock.
   
• Bonds and common stock are separated by preferred stock, which provides income-focused portfolios with balance while offering greater security in volatile market conditions.

Preferred stock is a share that gives investors priority over common stockholders for assets and dividends, meaning you'll be paid first, much like a VIP pass at work.

Example: Akash’s Investment

Akash buys 100 preferred shares of XYZ Ltd. at ₹1,000 each, with a fixed dividend of 5%. Each year, he earns:

100 shares × ₹50 = ₹5,000 (guaranteed if the company profits).

Comparison Table:

Here’s a simple breakdown of preferred vs. common stock:
 

This table helps you see why preferred stock is a safer but less flexible investment.

For investors seeking a consistent income with minimal risk, preferred stock is an ideal choice. To help you make better investment decisions, this blog explains how it operates using Akash as an example.

Main Aspects of Preferred Stock

A unique kind of investment that falls somewhere between bonds and common stock is preferred stock. It gives investors priority in dividends and safety, but with some trade-offs.

Let's use an example to clearly explain its main characteristics.

1. Fixed Dividends (Steady Income)

Preferred stockholders receive fixed, regular payouts, unlike common stockholders, whose dividends can change.

Example:

Aman buys 100 preferred shares of ABC Ltd. at ₹1,000 per share with a 7% dividend.

• Yearly Income = 100 × ₹70 = ₹7,000 (guaranteed if the company makes a profit).

2. Liquidation Preference (Safety in Bankruptcy)

If a company shuts down, preferred shareholders get paid before common shareholders (but after debt holders).

Example:

If ABC Ltd. goes bankrupt and has ₹10,00,000 left, preferred shareholders like Aman get repaid first. Common shareholders may get nothing.

3. No Voting Rights (Limited Control)

Unlike common stock, preferred shares usually do not give voting power in company decisions.

4. Convertible to Common Stock (Growth Potential)

Some preferred shares can be swapped for common stock at a fixed ratio.

Example:

Aman’s one preferred share = 2 ordinary shares. If ABC’s common stock rises from ₹500 to ₹800, he can convert and profit.

5. Callable Feature (Company Can Buy Back Shares)

The company can repurchase preferred shares at a set price after a specific date.

Example:

ABC Ltd. can buy back Aman’s shares at ₹1,100 each after 5 years, even if the market price is higher.

6. Cumulative Dividends (Missed Payouts Are Owed Later)

If a company skips dividends, cumulative preferred shares ensure that unpaid amounts are paid later.

Example:

If ABC Ltd. misses ₹7,000 in dividends for 2 years, Aman is owed ₹14,000 before common shareholders receive any dividends.

7. Higher Claim in Liquidation (More Security)

Preferred shareholders rank above common shareholders but below bondholders in the event of a company failure.

8. Limited Capital Appreciation (Less Growth Than Common Stock)

Preferred stock prices don’t rise as much as common stock since dividends are fixed.

9. Interest Rate Risk (Prices Fall When Rates Rise)

If interest rates go up, preferred stock prices may drop (like bonds).

10. Participating Preferred (Extra Dividends in Profits)

Some preferred shares allow extra dividends if the company performs well.

Example:

If ABC Ltd. profits exceed expectations, Aman may get ₹70 + an extra ₹20 per share.

Comparison Table: Preferred vs. Common Stock

This table summarises the key differences:
 

This table helps you see why preferred stock is safer but less flexible than common stock.

Preferred stock is ideal for investors who want Steady income (fixed dividends), Lower risk (priority in payouts), and Safety (higher claim in liquidation), but it lacks Voting rights (no say in company decisions) and High growth (limited price appreciation)

Preferred stock may be a prudent investment if you prioritise steady returns over substantial gains.

Bonus Tip: Cumulative is a crucial feature, meaning that if a company suspends dividend payments, it must pay all missed (accumulated) dividends to preferred shareholders before it can pay any dividends to common shareholders. This provides an additional layer of protection for your income.

Real-life market example:

• Retirees are frequently drawn to preferred (preference) shares issued by banks in India because they offer fixed dividends of roughly 6–8% per year, which are higher than most bank fixed-deposit rates (7%), and they offer income stability with less risk. 

• Cumulative or non-convertible preference shares are popular formats that guarantee priority dividend payments even in recessions, making them a reliable option for income-focused, conservative portfolios. 

Who Should Invest in Preferred Stock?

Preferred stock is ideal for investors who want steady income with lower risk than common stocks. It works well for those who don’t need voting rights but want priority in dividends and payouts.

Example: Dev’s Investment Strategy

Dev, a retired banker, invests ₹5,00,000 in the preferred shares of a financial company that offers 8% fixed dividends.
 

• Yearly Income = ₹40,000 (guaranteed if the company profits).
   
• Even if the stock market crashes, Dev gets paid before common shareholders.

Best Investors for Preferred Stock
 

• Retirees: Need stable, passive income.
   
• Conservative Investors: Prefer safety over high growth.
   
• Income-Focused Portfolios: Want higher yields than bonds.

Who Should Avoid It?

Growth Investors: Common stocks offer better long-term gains.

Those Needing Voting Rights: Preferred shares usually don’t allow voting.

Quick Comparison: Preferred vs. Common Stock Investors

This table shows a comparison between preferred and common stock:
 

This table helps you decide if preferred stock aligns with your goals.

Preferred stock is a wise investment for those seeking steady income with lower risk, particularly for retirees like Dev. Common stocks are still preferable if you're looking for high growth or voting rights.

Conclusion

Preferred stock is an excellent choice for those seeking a steady income with minimal risk.  It will be ideal for retirees or cautious investors who value stability and fixed dividends over quick growth. 

Unlike common stock, you get your money first, but you won't be able to vote or witness significant price increases.  If you can tolerate lower risk and more reliable returns, preferred stock could be a brilliant addition to your portfolio.  

If you want more growth or a say in business decisions, common stock is still better. 

FAQs

Why do companies issue preferred stock?

To raise money without giving away voting rights or taking on more debt.

Why do preferred stock prices drop when interest rates rise?

Because their fixed dividends become less attractive compared to new investments offering higher rates.

Where can I buy preferred stock?

Through brokers, look for ticker symbols ending in “-PR” or similar, just like common stock.

How are preferred stock dividends paid?

Dividends are usually paid at a fixed rate (e.g., 6% of the par value) and are distributed quarterly or semi-annually. They must be paid to preferred shareholders before any dividends can be paid to common shareholders.
 

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?