Common Stock vs Preferred Stock: What Every Investor Should Know Before Buying Either

Most people who start investing just buy stocks without thinking about what type they're buying. That's fine for a while. But eventually, you'll come across the term preferred stock and wonder what it is and whether you should care. The answer is: it depends on what you're trying to do with your money.

This article breaks down common stock vs preferred stock in plain terms and explains what each one is, how they work, when each makes sense, and how to actually buy them.

Common stock vs preferred quick stock comparison

Before diving deep, here's a side-by-side look at the key differences between common shares and preferred shares:

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That table tells you a lot already. But let me give you a more human sense of what each means in practice.

Imagine a crypto exchange platform that has two kinds of owners. The first group (let's call them the common owners) gets to vote on big decisions. They also get a cut of whatever money is left after all the bills are paid. Some weeks, that's a lot. Some weeks, it's nothing.

The second group (the preferred owners) doesn't get to vote on anything. But every single week, no matter what, they get paid first with a fixed amount and before the common owners see a dime. And if the crypto exchange shuts down entirely, they also get their money back before the common owners do.

That's the whole thing. Common stock = more upside, more risk, more say. Preferred stock = steady income, lower risk, no say.

Scroll down further to dive deep into common stocks and preferred stocks.

What is common stock, really?

Common stock (also called common shares) is a unit of ownership in a corporation. It's the one investors buy most often. When someone says they "bought shares in Coinbase" or "invested in Robinhood," they're almost certainly talking about common shares.

Owning common stock generally gives shareholders voting rights; typically one vote per share. That means you have a say in decisions like electing the board of directors or approving major corporate moves.

But the bigger draw for most people isn't the voting; it's growth. Common stock can appreciate significantly when a company performs well, and that's why long-term investors love it. If you bought Circle common shares years ago and held them, the price appreciation did the heavy lifting, not dividends.

The flip side is real, though. Common shares are typically the last to receive proceeds during a liquidity event like a merger or bankruptcy. Preferred stockholders and creditors get paid first. If a company goes under, common shareholders may walk away with nothing.

Dividends on common shares aren't guaranteed. The value can go up or down based on company performance and broader economic conditions. That's the deal with common stock. High potential, real risk.

How to buy common stock

Buying common shares is one of the easier things to do in personal finance. Here's how it works:

1. Open a brokerage account: Interactive Brokers is solid for choice long-term investors worldwide.Fidelity, Charles Schwab, and Vanguard are fine if you’re from the US.
2. Fund your account: Transfer money from your bank. Most platforms allow ACH transfers that settle in 1-3 business days.
3. Search for the stock by ticker: Coinbase is COIN, Microstrategy is MSTR. Every publicly traded company has one.
4. Decide how many shares to buy: Many platforms now offer fractional shares. That means you can buy $50 worth of a $400 stock without needing the full amount.
5. Place your order: A market order buys at the current price. A limit order only executes if the price drops to your target.
6. Hold and let it work: Common stock tends to reward patience. The value of common shares can rise dramatically over time as the company gets larger and more profitable.

What is preferred stock, and how does it behave differently?

Preferred stock (also called preferred shares) blends characteristics of both common stock and bonds. You get a fixed dividend like a bond, but also own equity in the company like a common shareholder.

What is preferred stock doing differently from a dividend standpoint? A lot. Preferred stock pays fixed dividends on a regular schedule. Common stock dividends are variable and not guaranteed. So a company might pay preferred shareholders $2.00 per share per year, no matter what. Common shareholders might get $0.30 one quarter and zero the next.

Preferred stockholders also get paid before common stockholders every time. And in a bankruptcy scenario, preferred stockholders rank above common shareholders, though they're still behind bondholders and other creditors.

The trade-off is that preferred stock doesn't offer the same growth potential as common stock. In most cases preferred shareholders don't get a vote on company decisions.

So, who is preferred stock actually for? Income-focused investors. People who want predictable cash flow and aren't chasing price appreciation. Think retirees, income-oriented funds, or institutional investors who want stability over moonshots.

What is convertible preferred stock?

One variation worth understanding separately is convertible preferred stock. This shows up a lot in crypto startup investing and institutional portfolios.

Holders of convertible preferred shares have the option to convert their preferred shares into a specified number of common shares.Why would you want that? Imagine you held convertible preferred shares in Coinbase back in 2020 before the public listing. You were getting your fixed preferred dividends and sleeping fine. Then the COIN IPO happens and common shares are flying. Your convertible preferred lets you flip to common shares and participate in that upside instead of watching it happen from the sidelines.

This is why venture capital firms love convertible preferred. They want the downside protection of preferred shares, priority in liquidation, fixed dividends, guaranteed treatment, but also the option to switch to common if the company 10x's. It's the best of both worlds if you can get it.

There are a few other preferred stock variations worth knowing:

• Cumulative preferred stock: If a company skips dividend payments during a rough patch, cumulative preferred shareholders are entitled to those missed payments before common shareholders receive anything. It's a meaningful safety net.
• Non-cumulative preferred stock: If the company misses a dividend, shareholders lose that payment permanently. No catch-up, no recourse.
• Callable preferred stock: The issuing company can redeem these shares at a predetermined price after a specified date. Great for the company, less so for you if yields drop.

How to buy preferred stock

Buying preferred shares is less straightforward than buying common stock, but not by much.

1. Use a brokerage account: Same setup as common stock. Interactive Brokers, Fidelity, Schwab, and TD Ameritrade all support preferred stock trading.
2. Look up the preferred stock ticker: Preferred shares trade on major exchanges but with slightly different tickers. A company might list its preferred shares with a "/P" or "-P" suffix. Bank of America preferred series A, for example, trades as BAC-PA.
3. Check the dividend yield: Preferred stock ETFs typically yield between 5% and 7%. Individual preferred shares vary, so always confirm the yield before buying.
4. Consider a preferred stock ETF instead: The iShares preferred stock ETF invests in about 450 different preferred stocks from U.S.-based companies. For most people, this is simpler and more diversified than picking individual preferred shares.
5. Read the terms: Before buying any individual preferred stock, read the prospectus or term sheet. Know whether it's cumulative, callable, convertible, or participating. These terms have real implications for what you'll actually receive.
6. Watch interest rates: Just as bonds drop in price when rates rise, so do preferred shares. If you're buying preferred stock in a rising rate environment, understand you may see the market value of your shares decline even while dividends stay the same.

Not all companies offer preferred stock. It's most commonly issued by financial institutions, telecom providers, and utility companies. So if you're hunting for yield through preferred shares, those are the sectors to focus on.

Are private stocks common or preferred shares?

Private company shares are equity in companies that haven't gone public yet. Private common stock goes to founders and employees. They get voting rights and share in the upside if things go well, but they're last in line if the company gets sold or wound down. Preferred stock goes to angel investors, VCs, private equity firms, and other outside investors.

As you can see, private shares still follow the same common stock and preferred stock framework we've been discussing, except they don't trade on an open exchange.

And this matters specifically for crypto-native investors because the biggest names in Web3 infrastructure are still private. Fireblocks, Ripple, Kraken, Blockchain.com, and Tether are some of the companies you may have interacted with indirectly every time you've touched the crypto ecosystem. And a lot of their equity, both common shares and preferred shares, is quietly changing hands in secondary markets right now.

The practical challenge with private stock has always been access. Historically, you needed to be an institutional investor or a connected VC to even get a seat at the table. That's changed meaningfully over the last few years. OTC secondary marketplaces, such as Acquire.Fi, has made it possible for qualified investors to buy and sell private equity positions (both common and preferred) in a more structured way.

One thing worth noting: private stock is illiquid by definition. You can't sell it on an exchange tomorrow if you change your mind. This is genuinely different from both public common stock and public preferred stock, and it's something a lot of first-time buyers underestimate.

But if you've already made money in crypto and you're thinking about where the next layer of exposure could come from, private equity in crypto-native companies is a real answer. The upside of getting into Fireblocks or Kraken equity before any eventual public listing is the same logic that drove people into BTC at $1,000. The structure is just different.

Which one actually makes sense for you

Here's my honest take. Most retail investors don't need to overcomplicate this.

If you're in your 20s or 30s building long-term wealth, common stock is probably where the bulk of your portfolio should be. The growth potential outweighs the volatility risk over a 20 or 30-year horizon.

But if you're closer to retirement, living on investment income, or just risk-averse, preferred stock starts making sense. Predictable dividend income, priority in liquidation, lower volatility; those things matter when you're not in a position to wait out a market downturn.

I think the right answer for a lot of people is actually both. Preferred stock gives you predictable income. Common stock gives you growth potential. Together, they can balance a portfolio in a way that neither can alone.

The risk with common shares is that the upside clouds your judgment about the downside. And the risk with preferred shares is getting lulled into complacency by steady dividend checks while inflation quietly eats your purchasing power.

Know what you own. Understand why you own it. And revisit that reasoning as your life changes because what made sense at 35 probably doesn't make the same sense at 60.