Understanding Common Stock vs Preferred Stock

Did you know that shares in a company come in two different forms? Many retail investors don’t know the difference between common stock vs preferred stock. Even though the latter is used by legendary billionaire investor Warren Buffett! 

In fact, Buffett’s most recent billion-dollar purchases in Bank of America and Occidental Petroleum were mainly done through preferred stock. But what is the difference between preferred and common stock?

Read on to find out more and how to invest in both! ▼▼▼

In this article, you will learn:

✅ The difference between common stock and preferred stock. 

✅ How to start investing in both preferred and common stocks. 

✅ Why exchange traded funds (ETFs) provide the strongest exposure to preferred stock for retail investors. 

✅ Why preferred stock could provide unique opportunities for dividend income investors and how you can start investing in them too!

✅ How to open an Invest.MT5 account with a minimum of just €1 and access low commissions from just $0.01 on US stocks and ETFs.

✅ How to open a Trade.MT5 account to trade stocks and ETFs via Contracts for Difference (CFDs) which allows you to potentially profit from rising AND falling markets. 

✅ How to access actionable trading and investing ideas in real-time on thousands of markets using the exclusive Admirals Supreme Edition platform which is FREE to download!

✅ And much, much more!

Common stock vs preferred stock

When a company wants to raise capital to grow they offer shares of the company to investors. The shares offered can vary and could be one of two kinds: common stock or preferred stock. 

When answering the question ‘which best describes the difference between preferred and common stocks?’ there are a variety of differences that make each type of stock unique and are important for investors to know about. 

Did you know that you can view live prices of both preferred and common stocks from the MetaTrader 5 trading platform? In fact, you can view real-time prices of more than +3,000 stocks and ETFs from all around the world, access advanced research tools and trade directly from the platform too!

Click on the banner below to start your FREE download: ▼▼▼

✴️ What are common shares?

Common shares are perhaps the most common type of shares offered by companies and are also the ones that are most traded on by retail investors. The market for common shares is much bigger than it is for preferred shares. When the financial media talk about stocks they are generally referring to common stocks. 

When purchasing common shares the investor is essentially buying a piece a share of ownership in that company. The aim is to sell those shares back to the market after they have appreciated in value to profit from the difference between the price they bought at and the price they sold at. 

Holders of common shares typically receive voting rights on the stock as well as dividends for some companies. Dividends are essentially a share of the profits the company has made. You can learn more about this in the ‘Best Dividend Stocks for Income’ article.

✴️ What are preferred shares?

Preferred shares have some of the same features and characteristics of common shares but they also share some of the same features of a bond. A bond is simply a loan. The bond issuer (a company or government) borrows capital from the bondholder (the investor purchasing the bond). The bond issuer will make fixed payments to the bondholder at a fixed interest rate for a fixed period of time.

Preferred shares come with some of the same features as a bond such as a fixed amount of income through dividend payouts. This means the investor can capitalise on the potential gain in a company’s share price while being paid an income to hold the shares as well. Preferred stocks tend to pay higher dividends as well. 

For example, the Swedish bank Svenska Handelsbanken AB which you can invest in via the Admirals Invest.MT5 account offers two types of shares, as shown below from the Admirals Contract Specification page:

Source: Admirals Contract Specification, 26 January 2021

As you can see from the above the company provide access to invest in two types of shares:

▶️ SCA.A - Svenska Handelsbanken AB - PREF series A. The PREF wording stands for a preferred stock. 

▶️ SHB.B - Svenska Handelsbanken AB. As there is no PREF wording here, it is a common stock.

By looking at the recent dividend history of both of these companies, the preferred stock of Svenska Handelsbanken AB has paid out higher dividends on most occasions in the past. 

Source: Investing, 26 January 2021

The above table shows the historical dividend yield between the common stock (first half) and the preferred stock (second half). The dividend yield has been higher in the preferred stock than it has been in the common stock. While the dividend yield changes based on the share price, both types of stock have exhibited a very similar share price trend historically. 

Did you know that you can invest in more than 3,000 stocks and ETFs from 15 of the world’s largest stock exchanges with an Admirals Invest.MT5 account? 

With only a €1 minimum deposit to open the account, you can enjoy free access to real-time prices while accessing low commissions and low minimum transaction fees so you can build a portfolio of dividend-paying stocks! 

To get started, click on the banner below: ▼▼▼

The below screenshot shows the long-term, monthly trend of Svenska Handelsbanken AB PREF Series A shares. It is clear to see the long-term uptrend that developed between 1993 and 2006 and then again from 2009 to 2015. 

Source: Admirals MetaTrader 5, SCA.A, Monthly - Data range: from 1 Jan 1993 to 27 Jan 2021, accessed on 27 Jan 2021 at 13:30 GMT. Please note: Past performance is not a reliable indicator of future results.

Since 2015, the bank’s share price has struggled. While this decline would raise the dividend yield, the trend of this share price has been the same as the common stock of Svenska Handelsbanken AB, as the chart shows below:

Source: Admirals MetaTrader 5, SHB.B, Monthly - Data range: from 1 Jul 1991 to 27 Jan 2021, accessed on 27 Jan 2021 at 14:30 GMT. Please note: Past performance is not a reliable indicator of future results.

The chart above of Svenska Handelsbanken AB’s common stock is very similar to Svenska Handelsbanken AB PREF Series A preferred stock. The only difference is that the dividend yield would have been higher on the preferred stock investment. 

Preferred stocks also come with certain advantages over common stocks. This includes:

▶️ Preferred shares often have a higher dividend yield than common shares so can perform well in a low interest rate environment where investors search for yield. 

▶️ Holders of preferred stock are paid dividends before holders of common stock. 

▶️ Preferred stockholders have a better chance of being repaid and have a bigger claim on a company’s assets than common stockholders if a company goes bankrupt. 

Some preferred shares can also be convertible which means that the issuer of the shares has the right to redeem them from the market after a certain period of time. This may result in a significant premium to the preferred stockholder depending on market conditions. 

You can learn more about dividend stocks and dividend yields in this 46-minute video from a professional on ‘Why And How To Invest In Dividend Stocks.’ ▼▼▼

Difference between preferred and common stock

Now that you know more about the individual characteristics of preferred stock vs common stock let’s summarise some of the major differences before we look at how to start investing in either of them. 

One of the biggest difference between common stock and preferred stock is the payment of dividends. With common stock, dividends are paid out if the company is profitable. With preferred stock, dividends are paid out at fixed intervals regardless of the company’s profitability. They are also cumulative, which means if they miss one payment, it will need to be paid back in the next period. 

The claim to earnings is also quite important. If a company goes bankrupt then the preferred shareholders are first in line to get paid before common shareholders who could be left with nothing. This is why sticking to high-quality companies is essential for common stockholders. 

Some traders may also choose to speculate on the price direction of a stock (preferred or common) using Contracts for Difference (CFDs). This allows users to trade long and short and potentially profit from rising and falling markets as there is no ownership of the underlying asset. 

With CFDs, traders can also trade on margin. This means you can control a larger position size with a smaller deposit which can amplify returns and losses. Learn more today by clicking on the banner below to open an account: ▼▼▼

When to invest in common stock vs preferred stock

The choice between investing in common stocks or preferred stocks comes down to the investor’s style, of which there are many different types. This includes income investors, growth investors, value investors, etc. 

Generally speaking, investors who purchase common stocks are looking for a capital gain on their investment. This is the most common form of investing as there are simply more common shares available than preferred shares. 

Investors who purchase preferred shares are usually more interested in the dividend income they can receive. However, most investors shy away from preferred shares in an environment of rising interest rates as it lowers the par value of the shares. 

For example, Warren Buffett is known for holding stocks for a very long period of time. This is why he also likes dividend paying stocks. Fortunately for Buffett, his reputation allows him a lot of power in snapping up preferred shares. 

▶️ Buffett’s billion-dollar stake in Bank of America was a special class of 6% Cumulative Perpetual Preferred Stock issued to Berkshire Hathaway which also had a warrant to purchase 700 million shares of common stocks. 

▶️ Buffett’s $10 billion investment in Occidental Petroleum to buyout Anadarko Petroleum was made by purchasing 100,000 shares of preferred stock with a dividend payout of 8% per annum. 

While everyday investors may not be able to construct these types of deals, there are products which can help investors gain exposure to the preferred share market. One such product is an ETF, or exchange traded fund. 

Preferred stock vs common stock via ETFs

ETFs act as investment funds that track the performance of a specific group of instruments. There are ETFs that track stock market indices, international stock markets, commodities, currencies and stock market sectors. 

They provide investors with access to a range of markets that they would otherwise not be able to access. As an example, there are ETFs that track sectors such as Lithium and Batteries, Robotics, Renewable Energy and many others. You can learn more in the ‘How to Trade ETFs With Only €1,000’ article. 

With Admirals, you can trade on the iShares US Preferred Stock ETF CFD. This means you can speculate on the price direction of this ETF, both long and short. iShares is the world’s largest provider of ETFs. 

▶️ According to the fund’s factsheet, the aim of the iShares US Preferred Stock ETF is to provide investors “Exposure to U.S. preferred stocks, which have characteristics of bonds (pay a fixed dividend) and stocks (represent ownership in a company).”

The factsheet also provides an overview of the historical returns of the fund, as shown below based on a hypothetical $10,000 investment from 26 March 2007 and 26 January 2021:

Source: iShares, 27 January 2021

The fund also details other characteristics such as its top holdings within the portfolio and the sectors they are in. More than 60% of the fund is allocated towards financial institutions and more than 20% towards industrial companies. You can learn more about the different stock market sectors in the ‘11 Stock Markets Sectors You Need To Know’ article. 

The ETFs top 10 holdings by weighting, as of 26 January 2021, is shown below:

Source: iShares, 27 January 2021

Investors may choose to trade or invest in the ETF or choose some of the fund’s top holdings to invest in individually - if available to them. Some markets may not be available to invest in via traditional retail platforms. This is why ETFs are popular among retail investors as it allows them access to products they would not normally be able to access. 

Did you know that you can invest in the best stocks and ETFs from 15 of the world’s largest stock exchanges with an Admirals Invest.MT5 account? With only a €1 minimum deposit to open the account, you can enjoy free access to real-time prices while accessing low commissions and low minimum transaction fees! 

To get started, click on the banner below: ▼▼▼

How to invest in common stock vs preferred stock

Whether you are investing in common stock or preferred stock via the Admirals trading platform, you can do so in the same way. Just follow the four steps below:

▶️ Open your MetaTrader 5 trading platform provided by Admirals for FREE, or start your free download here if you don’t have it yet. 

▶️ Once you are in the platform, select View from the top menu to open the Market Watch window. 

▶️ Right-click in the Market Watch window and then select Symbols. Here you can search for individual markets covering a variety of asset classes. Start typing the market you wish to trade on and a selection of instruments will start to appear.

▶️ After pressing OK, this will add the symbol to your Market Watch window. Drag the symbol onto the chart to view historical and live prices of the instrument. To open a trading ticket, right-click on the chart and select Trading and then New Order. A trading ticket will open up for you to input your own entry, stop loss and take profit levels as well as your position size. 

A screenshot showing the MetaTrader 5 trading platform provided by Admirals with a trading ticket open on the chart.  

Did you know that you can find actionable trading and investing ideas automatically, in real-time and on a variety of asset classes such as stocks, ETFs, indices, commodities and currencies using the Technical Insight Lookup Indicator? 

You can get this completely FREE when upgrading your MetaTrader 5 trading platform to the Admirals Supreme Edition! 

For example, the image below shows a search for the iShares US Preferred Stock ETF in the indicator which then provides a list of actionable technical events for the short-term, intermediate-term and long-term:

A screenshot showing an example of searching for ‘iShares US Preferred Stock ETF’ in the Technical Insight Lookup indicator from the MetaTrader 5 Supreme Edition platform provided by Admirals. 

By combining technical events with fundamental research, investors can build a significant edge in the market to find high-quality opportunities across all major asset classes. It can be a great addition to your trading and investing setup!

Other articles you may find interesting:

• Overview of the Best MT5 Indicators
• How to Trade with MetaTrader WebTrader
• Use MetaTrader Like a Pro With MT4 & MT5 Shortcuts

About Admirals

Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.