Similarities with Common Stocks

• Like common stocks, preferred stocks represent ownership in the issuing corporation. Income from preferred stocks is called dividends, as is income from common stocks. Common and preferred stocks are issued as perpetual securities, with no maturity date.
  
  

Differences from Common Stocks

• Preferred stocks are issued with a par, or face, value. Common stocks can be issued without par, or with a nominal par. For example, a preferred stock can be issued with a par value of $25, whereas common stock can have a par value of 0.001 cent.
  
  Common stocks confer voting rights on shareholders. Preferred stocks do not carry voting rights.
  
  Common stocks may or may not pay dividends, and if they do, the dividend is entirely at the discretion of the board of directors. Preferred stocks are usually issued with a fixed dividend.
  
  A corporation can buy back or split common stock but it cannot redeem or cancel it. Preferred stocks have a call feature that allows the the corporation to redeem them (pay them off) after a certain date.
  
  Some preferred stocks may, under certain conditions, be converted into common stock.
  
  

Similarities with Bonds

• Like most bonds, preferred stocks usually pay a fixed amount of income and fluctuate with interest rates. Many bonds are also issued with a call feature; when interest rates fall, a corporation can refinance high-coupon bonds and high-dividend preferred stocks with lower-cost debt.
  
  

Differences from Bonds

• Under certain conditions, a corporation may suspend or omit a preferred stock dividend, but if it skips a bond interest payment, it goes into default, which could trigger bankruptcy. Bonds are issued with maturity dates; preferred stocks have no maturity date, although they are usually issued with a call provision.
  
  

The Worst of Both Worlds

• Common stocks have unlimited appreciation potential. Preferred stocks have limited upside because they can be called at par. For example, a $25 par value preferred stock may trade at $28 but can be redeemed at $25, making investors reluctant to pay too much above par. A $25 common stock can appreciate to $50 or $250---there is no limit.
  
  If a corporation goes into bankruptcy, bondholders are paid ahead of preferred stockholders.
  
  This makes preferred stocks the worst of both worlds in the eyes of some investors. They prefer to buy common stocks for appreciation and bonds for income.