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Finance Glossary

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Common Vs. Preferred Shares


The name generally gives it away. When something is common, it has the stench of the sweat of bricklayers, plumbers and people who actually work for a living, i.e., the commoners. They live at the bottom of the food chain. Yet, they are the most powerful force in structuring society. Common shareholders function the same way. They are the last to receive payment if a company defaults but if a company does extremely well, it is the common shareholders that make the fortune.

Preferred shares occupy a higher position on the corporate food chain. They are considered equity, but preferred shareholders stand in line before the commoners in a liquidation. Most preferred shares have a fixed dividend which the company cannot alter without the preferred shareholder's consent and they usually have the right to be paid in full on their dividends before the commoners are entitled to any payouts. In practice, preferred stock is almost always convertible into common stock at a given price. So, while preferred stock looks somewhat like a bond in that there is an obligation for the corporation to pay a fixed dividend on that stock, in non-convertible preferred, those pieces of paper are really more like debt in cross dressed clothing.

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