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Preferred stock generally has priority over common stock for dividends and liquidation proceeds, while common stock generally carries shareholder voting rights. Neither class guarantees dividend payments or protects an investor from losses. The specific rights depend on the terms of the share issue.
How preferred and common stock differ
The SEC’s Investor.gov stock FAQ describes common and preferred stock as the two main kinds of stock and outlines their usual differences. The comparison below is general: an individual issue’s governing documents determine its actual rights.
| Feature | Common stock | Preferred stock |
|---|---|---|
| Dividends | May receive dividends if the company declares and pays them. | Generally receives dividend payments before common stockholders. |
| Voting | Generally gives owners the right to vote at shareholder meetings. | Usually does not carry voting rights. |
| Liquidation priority | Ranks behind preferred stock; common holders may receive nothing. | Ranks ahead of common stock, but behind bondholders in the SEC’s description. |
| Investment risk | Stock prices can fall, and investors can lose money. | Also subject to stock-price declines and investment loss; the general comparison does not establish that it is safer. |
Do preferred stocks pay dividends before common stock?
Generally, yes: preferred stockholders receive dividend payments before common stockholders. That is a priority, not a promise that a dividend will be declared or paid. Common stockholders may receive dividends when the company declares and pays them, but they do not have the same general priority.
Check the specific issue’s dividend provisions rather than relying on the preferred label. The general SEC description does not establish the payment terms of any particular security.
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Do preferred shareholders have voting rights?
Common stock generally gives owners the right to vote at shareholder meetings. Preferred stock usually does not. These are general patterns, not guarantees about every share issue. Consult the security’s governing documents to see what voting rights, if any, apply.
What happens to each class if a company liquidates?
In a liquidation, bondholders are paid before preferred stockholders, and preferred stockholders rank ahead of common stockholders. Common holders may receive whatever remains after higher-priority claims, which may be nothing, according to the SEC’s general explanation.
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Priority does not guarantee recovery. It describes the order of claims, not whether the company has enough assets to pay them.
Are preferred stocks less risky than common stock?
The class distinction alone does not establish that preferred stock is safer. Stock prices can move down as well as up, and investors can lose the money they invest. The SEC’s general stock-risk explanation does not provide a class-by-class risk estimate or predict the performance of a particular security.
What to check before comparing a specific share
Use the issuer’s offering and governing documents to verify the rights and risks of the actual issue. Compare:
- Dividend provisions: when payments may be made and the priority described for the issue.
- Voting provisions: whether holders can vote and on what matters.
- Liquidation terms: how the issue ranks in a liquidation.
- Investment risks: the issuer’s stated risks for that particular security.
The SEC FAQ provides a general educational comparison; it does not establish a specific issue’s terms, suitability, valuation, or expected return.
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