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What Is Preferred Stock?
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What Is Preferred Stock?
Preferred stock has features of common stock and bonds. It can be less risky than common stock but riskier than bonds.
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Tiffany Lam-Balfour is a former investing writer and spokesperson at NerdWallet. Previously, she was a senior financial advisor and sales manager at Merrill Lynch. Her work has been featured in MSN, MarketWatch, Entrepreneur, Nasdaq and Yahoo Finance. Tiffany earned a finance and management degree from The Wharton School of the University of Pennsylvania. Lead Writer + more + more
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Arielle O’Shea leads the investing and taxes team at NerdWallet. She has covered personal finance and investing for nearly 20 years, and was a senior writer and spokesperson at NerdWallet before becoming an editor. Previously, she was a researcher and reporter for leading personal finance journalist and author Jean Chatzky, a role that included developing financial education programs, interviewing subject matter experts and helping to produce television and radio segments. Arielle has appeared on the "Today" show, NBC News and ABC's "World News Tonight," and has been quoted in national publications including The New York Times, MarketWatch and Bloomberg News. She is based in Charlottesville, Virginia. Published in Head of Content, Investing & Taxes + more + more
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James F. Royal, Ph.D., is a former NerdWallet writer. His work has also been featured in the Washington Post, New York Times and the Associated Press.
James F. Royal, Ph.D., is a former NerdWallet writer. His work has also been featured in the Washington Post, New York Times and the Associated Press. Writer + more + more Nerdy takeawaysPreferred stock has more protections for investors than common stock.
Preferred stocks typically pay out fixed dividends on a regular schedule.
Preferred stock is often considered less risky than common stock.
Investors who want to buy stock in a company may be able to choose between two main types of shares: common stock or preferred stock (aka "preferred shares" or "preferreds").
Investors who want to buy stock in a company may be able to choose between two main types of shares: common stock or preferred stock (aka "preferred shares" or "preferreds").What is a preferred stock?
What is a preferred stock?Preferred stock is a type of stock that has priority over common stock for distributions of dividends or assets in the event the company has to liquidate. Preferred stock is often perceived as less risky than common stock but riskier than bonds.
Preferred stock is a type of stock that has priority over common stock for distributions of dividends or assets in the event the company has to liquidate. Preferred stock is often perceived as less risky than common stock but riskier than bonds.Brokerage firms
Brokerage firms
Brokerage firmson Charles Schwab's website
on E*TRADE's website
on Vanguard's website
on Fidelity's website
How preferred stock works
How preferred stock worksIn several ways, preferred stocks are similar to bonds.
In several ways, preferred stocks are similar to bonds bonds .Preferred stocks typically pay dividends on a regular schedule, similar to how a bond makes coupon interest payments.
Preferred stocks typically pay dividends on a regular schedule, similar to how a bond makes coupon interest payments.Similar to bonds, the value of a preferred stock may fluctuate with changes in interest rates.
Similar to bonds, the value of a preferred stock may fluctuate with changes in interest rates .Like bonds, preferred stock can be repurchased, or “called,” by the issuer after a certain period.
Like bonds, preferred stock can be repurchased, or “called,” by the issuer after a certain period.Similar to bonds, preferred stock often doesn’t come with voting rights (common stock usually does).
Similar to bonds, preferred stock often doesn’t come with voting rights (common stock usually does).» MORE: How capital gains tax works and how to save
» MORE: How capital gains tax works and how to save » MORE: How capital gains tax works and how to saveThat’s about where the similarities end, however. Preferreds have some quirks that separate them from bonds, making them attractive to investors.
That’s about where the similarities end, however. Preferreds have some quirks that separate them from bonds, making them attractive to investors.Bonds mature, but preferred stock typically does not. Unless the company repurchases the preferred shares, they can remain outstanding indefinitely.
Bonds mature, but preferred stock typically does not. Unless the company repurchases the preferred shares, they can remain outstanding indefinitely.Preferred dividends can be postponed (and sometimes skipped entirely) without penalty. Companies make use of this unique feature if they’re unable to make a dividend payment. Cumulative preferred stock can postpone the dividend but not skip it entirely — the company must pay the dividend at a later date. Noncumulative preferred stocks may skip dividends completely without any legal penalty. However, this will make it difficult for the company to raise money in the future.
Preferred dividends can be postponed (and sometimes skipped entirely) without penalty. Companies make use of this unique feature if they’re unable to make a dividend payment. Cumulative preferred stock can postpone the dividend but not skip it entirely — the company must pay the dividend at a later date. Noncumulative preferred stocks may skip dividends completely without any legal penalty. However, this will make it difficult for the company to raise money in the future.Preferred stock can be convertible. This means the shareholder can exchange their shares for a specified number of shares of common stock at a specified price at some point in the future.
Preferred stock can be convertible. This means the shareholder can exchange their shares for a specified number of shares of common stock at a specified price at some point in the future.» MORE: How taxes on stocks work
» MORE: How taxes on stocks work » MORE: How taxes on stocks work ? Nerdy TipThe ticker symbols for preferred shares are different from their common stock counterparts. Make sure to verify all of the details to ensure you are purchasing the share class you want.
The ticker symbols for preferred shares are different from their common stock counterparts. Make sure to verify all of the details to ensure you are purchasing the share class you want.Preferred stock vs. common stock vs. bonds
Preferred stock vs. common stock vs. bondsPreferred stocks can provide steady income via dividends but may have less upside potential compared to common stocks and may carry more risk than bonds.
Preferred stocks can provide steady income via dividends but may have less upside potential compared to common stocks and may carry more risk than bonds.Bonds: Bonds are typically a relatively less risky way to invest in a publicly traded company. Typically the issuer must make the required interest and principal payments on its bonds before it can pay any dividends on preferred or common stock. If the company were to liquidate, bondholders would have seniority over the preferred and common shareholders in terms of making a claim on whatever assets are left in the bankrupt company.
Bonds: Bonds: Bonds are typically a relatively less risky way to invest in a publicly traded company. Typically the issuer must make the required interest and principal payments on its bonds before it can pay any dividends on preferred or common stock. If the company were to liquidate, bondholders would have seniority over the preferred and common shareholders in terms of making a claim on whatever assets are left in the bankrupt company.Preferred stock: Preferred stock is subordinate to bonds but senior to common stock. The issuer typically must make the required interest and principal payments on its bonds before it can pay the preferred holders.
Preferred stock: Preferred stock: Preferred stock is subordinate to bonds but senior to common stock. The issuer typically must make the required interest and principal payments on its bonds before it can pay the preferred holders.Common stock: Common stockholders receive dividends only if the company declares a dividend and is able to pay its other bondholders and preferred shareholders. In the event of a company’s liquidation in bankruptcy, the common stockholders get what’s left after bondholders and preferred stockholders have been made whole.
Common stock: Common stock: Common stockholders receive dividends only if the company declares a dividend and is able to pay its other bondholders and preferred shareholders. In the event of a company’s liquidation in bankruptcy, the common stockholders get what’s left after bondholders and preferred stockholders have been made whole.» MORE: Learn how wealth management works
» MORE: Learn how wealth management works » MORE: Learn how wealth management worksBonds
Bonds
BondsPreferred stock
Preferred stock
Preferred stockCommon stock
Common stock
Common stockOwnership stake in company
Ownership stake in companyDebt holder.
Debt holder.Equity owner.
Equity owner.Equity owner.
Equity owner.Risk
RiskRelatively less risk and price volatility.
Relatively less risk and price volatility.Relatively medium risk and price volatility.
Relatively medium risk and price volatility.Relatively less risk and price volatility.
Relatively less risk and price volatility.Voting rights
Voting rightsNone.
None.Typically none.
Typically none.Proportional to ownership level.
Proportional to ownership level.Distribution of assets (in bankruptcy)
Distribution of assets (in bankruptcy)Typically has a claim on assets that is senior to the stockholders.
Typically has a claim on assets that is senior to the stockholders.Paid after bondholders but before common shareholders
Paid after bondholders but before common shareholdersLast if funds remain after paying bondholders and preferred holders
Last if funds remain after paying bondholders and preferred holdersHow to buy preferred stock
How to buy preferred stockPreferred stocks trade on exchanges similar to how common stock trades, which provides pricing transparency. However, most companies do not issue preferred stock, so the total market for preferred stock is relatively small and liquidity can be limited.
Preferred stocks trade on exchanges similar to how common stock trades, which provides pricing transparency. However, most companies do not issue preferred stock, so the total market for preferred stock is relatively small and liquidity can be limited.Common issuers of preferred stocks are banks, insurance companies, utilities and real estate investment trusts or REITs. Companies issuing preferreds may have more than one offering.
Common issuers of preferred stocks are banks, insurance companies, utilities and real estate investment trusts or REITs REITs . Companies issuing preferreds may have more than one offering.Before purchasing preferreds, an investor can review the rating from Moody’s or S&P for each particular offering and consider other features, such as yields, callability or convertibility.
Before purchasing preferreds, an investor can review the rating from Moody’s or S&P for each particular offering and consider other features, such as yields, callability or convertibility.As with other stock and bond investments, an investor can reduce risk by diversifying the preferred stocks in their portfolio. One way to do this is through an ETF or mutual fund, which allows you to buy a pool of preferred stocks and minimize the risk associated with just one offering.
As with other stock and bond investments, an investor can reduce risk by diversifying the preferred stocks in their portfolio. One way to do this is through an ETF or mutual fund ETF or mutual fund , which allows you to buy a pool of preferred stocks and minimize the risk associated with just one offering.» MORE: How to find a good financial advisor
» MORE: How to find a good financial advisor » MORE: How to find a good financial advisor ADEarn 3.76% APY by investing in U.S. Treasury Bills*
Earn 3.76 % APY by investing in U.S. Treasury Bills* Maximize your cash by investing in low-risk, government-backed T-Bills. All the work is done for you — just make the deposit and watch your money grow. Learn More *Rate when held to maturity. Rate shown is subject to price fluctuations. About the authors Tiffany Lam-Balfour Tiffany Lam-Balfour Tiffany Lam-Balfour is a former investing writer and spokesperson at NerdWallet. Previously, she was a senior financial advisor and sales manager at Merrill Lynch. Her work has been featured in MSN, MarketWatch, Entrepreneur, Nasdaq and Yahoo Finance. Tiffany earned a finance and management degree from The Wharton School of the University of Pennsylvania. See full bio. James Royal, Ph.D. James Royal, Ph.D. James F. Royal, Ph.D., is a former NerdWallet writer. His work has also been featured in the Washington Post, New York Times and the Associated Press. See full bio.Helpful resources
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