Preferred vs Common Stock: Which Should You Actually Buy?

When it comes to building an investment portfolio, understanding the gap between common stock and preferred stock can make all the difference. While they’re both called “stock,” these two asset classes operate on completely different principles and attract different types of investors.

The Ownership Game: Common Stock Explained

Common stock represents actual ownership in a company. When you buy it, you’re purchasing a slice of the business itself. This is why common stock prices move significantly—they reflect market sentiment about the company’s future profitability and growth potential.

Here’s what makes common stock attractive: If the company succeeds, your stock price can soar. Top-performing stocks have returned over 20% annually for decades. Even the broader S&P 500 index has averaged around 10% annual returns historically. Beyond price appreciation, many companies reward shareholders with cash dividends, typically paid quarterly.

Common stockholders also get voting rights in shareholder meetings and have a say in company direction. Companies love issuing common stock because it raises massive amounts of capital—sometimes billions of dollars—without creating debt obligations. If the company struggles, it won’t go bankrupt from missing dividend payments since those aren’t guaranteed.

The Income Play: Understanding Preferred Stock

Preferred stock is the fixed-income cousin. Despite having “stock” in the name, it behaves much more like a bond than common stock. It pays set distributions on a regular schedule (usually quarterly) and typically has a par value of $25 per share.

Here’s the key hierarchy: When dividends flow, preferred stockholders get paid first—before common stockholders see anything. That seniority makes it “preferred.” However, if the company struggles and skips dividends entirely, it’s not technically a default like it would be with bonds. That flexibility attracts companies but adds risk for investors.

Preferred stocks have limited upside. They rarely move much beyond par value, so you’re buying them primarily for steady income, not for potential wealth creation.

Preferred vs Common Stock: The Real Differences

Income & Risk Profile: Common stock offers growth potential but no guaranteed returns. Preferred stock promises predictable distributions but caps your upside. Common stocks suit investors with long time horizons; preferreds work for those needing regular income now.

Tax Treatment: Common stock has a tax advantage—you don’t owe capital gains taxes until you sell. Hold for decades and grow your wealth tax-free. Dividends do get taxed, but the stock appreciation doesn’t. Preferred stocks are taxed more like bonds, reducing the after-tax benefit.

Dilution & Refinancing: Companies can issue new common stock at will, diluting existing shareholders’ value. Preferred stocks don’t face this issue—the company’s obligation to pay stays constant. However, preferreds past their call date can be refinanced at lower rates when interest rates drop, eliminating your high-yield advantage.

Industry Concentration: Common stock exists everywhere. Preferred stock is concentrated in banks, real estate investment trusts (REITs), utilities, and master limited partnerships. Most companies don’t issue them at all. REITs particularly favor cumulative preferreds (where missed dividends must be paid back later).

The Buying Process: How to Access Each

Both types are available through any online stock broker. The ticker symbols differ—preferred stocks use the base common ticker plus a suffix. Take Public Storage (NYSE: PSA) as an example:

• PSA = common stock
• PSA-PD = Series D preferred stock
• PSA-PE = Series E preferred stock

Different brokers use different suffix formats (-PD, -D, .D, PRD), so double-check your order before confirming.

Which Type Fits Your Goals?

If you have decades before needing the money and can tolerate volatility, common stock is your vehicle for wealth building. If you’re retired or need steady cash flow today, preferred stock delivers more predictable income with less fluctuation.

The winning move? Many investors own both. Common stocks in growth positions, preferreds for income stability. Match your holdings to your timeline and cash flow needs—that’s how you build a resilient portfolio aligned with preferred versus common stock realities.