Preferred stock: what it is, how it works, and why it matters
When people talk about investing in stocks, they’re usually referring to common stock — shares that represent ownership in a company and voting rights on major decisions. But there’s another type of stock that shows up quietly in many portfolios, especially income-focused ones: preferred stock.
Preferred stock sits somewhere between common stock and bonds. It’s a form of ownership with its own rules, benefits, and trade-offs. Understanding how it works can help investors better track investments, evaluate portfolio risk, and make more informed decisions about investment fees, advisor recommendations, and long-term outcomes like retirement readiness.
What Is preferred stock?
Preferred stock (sometimes called preferred shares) is a class of equity that comes with special rights compared to common stock.
Like common stockholders, preferred shareholders own part of the company. But instead of voting power, they typically receive priority treatment, particularly when it comes to dividends and claims on assets.
In most cases:
Preferred shareholders do not have voting rights
They receive dividends before common shareholders
They rank ahead of common shareholders if a company is liquidated
This structure is one reason preferred stock often appears in income strategies recommended by a financial advisor or embedded inside mutual funds and ETFs.
For a deeper explanation of how preferred stock fits into corporate capital structures, see:
How preferred stock works
Preferred stock has several defining characteristics that shape how it behaves inside a portfolio —and how it should be monitored using an investment tracker or portfolio tracker.
Dividend priority
Preferred stock usually pays a fixed dividend, similar to interest on a bond. These dividends are typically paid on a regular schedule and must be paid before dividends on common stock.
If a company struggles financially, it may pause dividends on common stock while continuing to pay preferred dividends. In some cases, unpaid dividends accumulate and must be paid later before common shareholders receive anything.
This makes preferred stock appealing to investors seeking income—but it also makes it important to track investments carefully using clear reporting tools like Truthifi’s Explore feature: https://truthifi.com/features/statement
Claim on assets
If a company goes out of business, preferred shareholders have a higher claim on assets than common shareholders, but they still sit behind creditors such as bondholders and banks.
This “middle-of-the-stack” position is why preferred stock is often described as a hybrid between equity and fixed income. More detail on liquidation priority can be found here:
Market trading
Preferred shares generally trade on public exchanges, but often with less volume and liquidity than common stock. Their prices tend to move more with interest rates and dividend expectations than with company growth headlines.
Types of preferred stock
Not all preferred stock works the same way. Companies can issue preferred shares with different features, including:
Cumulative preferred stock: Unpaid dividends accumulate and must be paid before common stock dividends resume.
Non-cumulative preferred stock: Missed dividends are not owed in the future.
Convertible preferred stock: Can be converted into common stock under certain conditions.
Callable preferred stock: Allows the issuing company to buy the shares back after a set date.
Each type comes with its own risks and benefits, so the details of the specific issue matter. Because these terms vary widely, it’s easy for complexity to obscure true risk. Tools that highlight structural overlap — like Truthifi’s Overlap feature — can help reveal hidden concentrations across funds and securities: https://truthifi.com/features/overlap
More on preferred stock structures: https://www.fidelity.com/learning-center/investment-products/stocks/preferred-stock
Preferred stock vs. common stock
While both represent ownership, preferred and common stock behave very differently.
Dividends: Preferred stock usually pays a fixed dividend and gets paid first. Common stock dividends vary and are paid only after preferred dividends.
Voting rights: Preferred shareholders typically don’t vote. Common shareholders usually do.
Growth potential: Preferred stock tends to offer steadier income but limited price growth. Common stock offers more upside if the company grows.
This distinction matters when evaluating best mutual funds, index fund performance, or best value ETFs to invest in, many of which hold preferred securities indirectly.
Why investors use preferred stock
Preferred stock can play a role in certain portfolios, especially when income is a priority.
Steady income
Because dividends are often fixed and prioritized, preferred stock is frequently used by investors seeking predictable income, especially in retirement-focused portfolios.
Lower volatility
Preferred shares tend to fluctuate less than common stock because their value is driven more by dividend payments and interest rates than by company growth expectations.
Advisor strategy
For companies and advisors, preferred stock can be a way to raise or deploy capital without increasing traditional debt or diluting voting control. That makes it especially important to evaluate advisor fees, investment fees, and incentives tied to product selection.
Truthifi’s Fees feature is designed to help investors understand exactly what they’re paying and why: https://truthifi.com/features/fees
Additional context on preferred stock and income investing:
Things to watch out for
Preferred stock comes with trade-offs that deserve careful investment monitoring:
Interest rate sensitivity: Rising interest rates can reduce the appeal of existing preferred shares.
Limited upside: Preferred stock usually doesn’t benefit as much from strong company growth.
Complex terms: Features like call provisions or conversion rights can affect returns in ways that aren’t always obvious.
Understanding the terms of a specific preferred stock issue is essential.
For broader guidance on how to protect investments: https://www.sec.gov/investor/alerts
Is preferred stock right for you?
Preferred stock can make sense for investors prioritizing income, stability, and financial transparency, but it’s not a substitute for common stock or a guarantee of safety.
Whether preferred stock helps or hurts your portfolio depends on:
How it fits into your overall allocation
The fees attached to it
Whether it aligns with your goals and timeline
Clear tools and unbiased insight are essential for building financial trust, evaluating financial advisors, and deciding when it may be time to find a new financial advisor.
Related articles
Preferred stock: what it is, how it works, and why it matters
When people talk about investing in stocks, they’re usually referring to common stock — shares that represent ownership in a company and voting rights on major decisions. But there’s another type of stock that shows up quietly in many portfolios, especially income-focused ones: preferred stock.
Preferred stock sits somewhere between common stock and bonds. It’s a form of ownership with its own rules, benefits, and trade-offs. Understanding how it works can help investors better track investments, evaluate portfolio risk, and make more informed decisions about investment fees, advisor recommendations, and long-term outcomes like retirement readiness.
What Is preferred stock?
Preferred stock (sometimes called preferred shares) is a class of equity that comes with special rights compared to common stock.
Like common stockholders, preferred shareholders own part of the company. But instead of voting power, they typically receive priority treatment, particularly when it comes to dividends and claims on assets.
In most cases:
Preferred shareholders do not have voting rights
They receive dividends before common shareholders
They rank ahead of common shareholders if a company is liquidated
This structure is one reason preferred stock often appears in income strategies recommended by a financial advisor or embedded inside mutual funds and ETFs.
For a deeper explanation of how preferred stock fits into corporate capital structures, see:
How preferred stock works
Preferred stock has several defining characteristics that shape how it behaves inside a portfolio —and how it should be monitored using an investment tracker or portfolio tracker.
Dividend priority
Preferred stock usually pays a fixed dividend, similar to interest on a bond. These dividends are typically paid on a regular schedule and must be paid before dividends on common stock.
If a company struggles financially, it may pause dividends on common stock while continuing to pay preferred dividends. In some cases, unpaid dividends accumulate and must be paid later before common shareholders receive anything.
This makes preferred stock appealing to investors seeking income—but it also makes it important to track investments carefully using clear reporting tools like Truthifi’s Explore feature: https://truthifi.com/features/statement
Claim on assets
If a company goes out of business, preferred shareholders have a higher claim on assets than common shareholders, but they still sit behind creditors such as bondholders and banks.
This “middle-of-the-stack” position is why preferred stock is often described as a hybrid between equity and fixed income. More detail on liquidation priority can be found here:
Market trading
Preferred shares generally trade on public exchanges, but often with less volume and liquidity than common stock. Their prices tend to move more with interest rates and dividend expectations than with company growth headlines.
Types of preferred stock
Not all preferred stock works the same way. Companies can issue preferred shares with different features, including:
Cumulative preferred stock: Unpaid dividends accumulate and must be paid before common stock dividends resume.
Non-cumulative preferred stock: Missed dividends are not owed in the future.
Convertible preferred stock: Can be converted into common stock under certain conditions.
Callable preferred stock: Allows the issuing company to buy the shares back after a set date.
Each type comes with its own risks and benefits, so the details of the specific issue matter. Because these terms vary widely, it’s easy for complexity to obscure true risk. Tools that highlight structural overlap — like Truthifi’s Overlap feature — can help reveal hidden concentrations across funds and securities: https://truthifi.com/features/overlap
More on preferred stock structures: https://www.fidelity.com/learning-center/investment-products/stocks/preferred-stock
Preferred stock vs. common stock
While both represent ownership, preferred and common stock behave very differently.
Dividends: Preferred stock usually pays a fixed dividend and gets paid first. Common stock dividends vary and are paid only after preferred dividends.
Voting rights: Preferred shareholders typically don’t vote. Common shareholders usually do.
Growth potential: Preferred stock tends to offer steadier income but limited price growth. Common stock offers more upside if the company grows.
This distinction matters when evaluating best mutual funds, index fund performance, or best value ETFs to invest in, many of which hold preferred securities indirectly.
Why investors use preferred stock
Preferred stock can play a role in certain portfolios, especially when income is a priority.
Steady income
Because dividends are often fixed and prioritized, preferred stock is frequently used by investors seeking predictable income, especially in retirement-focused portfolios.
Lower volatility
Preferred shares tend to fluctuate less than common stock because their value is driven more by dividend payments and interest rates than by company growth expectations.
Advisor strategy
For companies and advisors, preferred stock can be a way to raise or deploy capital without increasing traditional debt or diluting voting control. That makes it especially important to evaluate advisor fees, investment fees, and incentives tied to product selection.
Truthifi’s Fees feature is designed to help investors understand exactly what they’re paying and why: https://truthifi.com/features/fees
Additional context on preferred stock and income investing:
Things to watch out for
Preferred stock comes with trade-offs that deserve careful investment monitoring:
Interest rate sensitivity: Rising interest rates can reduce the appeal of existing preferred shares.
Limited upside: Preferred stock usually doesn’t benefit as much from strong company growth.
Complex terms: Features like call provisions or conversion rights can affect returns in ways that aren’t always obvious.
Understanding the terms of a specific preferred stock issue is essential.
For broader guidance on how to protect investments: https://www.sec.gov/investor/alerts
Is preferred stock right for you?
Preferred stock can make sense for investors prioritizing income, stability, and financial transparency, but it’s not a substitute for common stock or a guarantee of safety.
Whether preferred stock helps or hurts your portfolio depends on:
How it fits into your overall allocation
The fees attached to it
Whether it aligns with your goals and timeline
Clear tools and unbiased insight are essential for building financial trust, evaluating financial advisors, and deciding when it may be time to find a new financial advisor.
Related articles
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always consult with a qualified financial advisor before making investment decisions.