Common vs Preferred Shares

Common shares are the standard form of company ownership: they usually carry voting rights and receive whatever profit and value is left after everyone else is paid. Preferred shares give up most of that upside in exchange for a fixed dividend that must be paid before common shareholders get anything, and a higher place in line if the company is wound up.

In short: think of a company’s investors as a queue. Lenders stand at the front. Preferred shareholders stand behind them, with a fixed, stated dividend and a set claim on assets. Common shareholders stand at the back, with no fixed payment but no cap on what they can earn either. Preferred shares behave a lot like bonds; common shares are what most people mean by “stock.”

Common shares

When people buy “a stock,” they almost always buy common shares (called common stock in the US). The typical package:

• One vote per share on electing the board and major decisions, though some companies issue classes with more or fewer votes.
• A residual claim on profits and assets: no fixed payout, but all the upside after obligations are met. See what is a stock.
• Dividends only if the board declares them, and only after preferred dividends are paid.

Dual-class and multiple-class shares

Some companies issue more than one class of common shares with different voting rights. Founders keep high-vote shares and sell low-vote or no-vote shares to the public, so they control the company with a minority of the economic stake.

• Alphabet has three classes. In its 10-K for fiscal 2025, Alphabet states that Class B shares have 10 votes each, Class A shares have one vote, and Class C shares have no voting rights. Larry Page and Sergey Brin’s Class B holdings represented about 52.7% of the voting power. Class A trades as GOOGL and Class C as GOOG; the economic rights are the same.
• In Canada, multiple-class structures are common among family- and founder-controlled companies. Rogers Communications, for example, has voting Class A shares and non-voting Class B shares. Shopify has Class A subordinate voting shares and Class B restricted voting shares.

Canada adds a protection the US doesn’t require in the same way. Under section 624 of the TSX Company Manual, the TSX generally won’t list non-voting or subordinate voting shares unless they have coattail provisions: if someone makes a takeover bid for the high-vote shares, the low-vote holders must be able to participate on equal terms. The rule grew out of a 1980s takeover fight over Canadian Tire, where the regulator found that a bid for the voting shares alone abused the non-voting shareholders.

Index providers have gone back and forth on dual-class companies. S&P Dow Jones Indices stopped adding new companies with multiple share classes to the S&P 500 in 2017, then reversed that rule in April 2023.

Preferred shares

Preferred shares (preferred stock) sit between bonds and common shares. Typical features:

• A stated dividend, usually a fixed percentage of a par or issue value. In both the US and Canada, many preferreds are issued at $25.
• Priority over common dividends. The company can’t pay a common dividend unless the preferred dividend has been paid.
• Cumulative or non-cumulative. With cumulative preferreds, skipped dividends accumulate as arrears that must be paid before any common dividend. With non-cumulative preferreds, a skipped dividend is simply lost.
• Usually no vote, except in specific situations (for example, after several missed dividends).
• Priority in liquidation over common shares, up to the stated liquidation value, but behind all debt.
• Often callable: the company can redeem them at a set price after a set date, typically when that suits the company.
• Sometimes convertible into common shares at a set ratio.

Preferred dividends are not interest. Missing one is not a default the way missing a bond payment is, which is why preferreds rank below debt.

Canada’s preferred share market

Canada has an unusually large exchange-listed preferred share market, dominated by banks, insurers, utilities, and pipelines. Two reasons:

• Taxes. Dividends from Canadian corporations can qualify as “eligible dividends” with the dividend tax credit, which lowers the tax rate for Canadian individuals in non-registered accounts compared with interest. See how stocks are taxed in Canada.
• Rate-reset structures. Many Canadian preferreds are rate-reset shares: the dividend is fixed for five years, then resets to the five-year Government of Canada bond yield plus a fixed spread set at issue. Holders often get an option at each reset to convert to a floating-rate version.

A rate-reset example (hypothetical). A $25 preferred pays 5.00% for its first five years: $25 × 5.00% = $1.25 a year. Its reset spread is 2.50%. On the reset date, the five-year Government of Canada yield is 3.00%, so the new rate is 3.00% + 2.50% = 5.50%, or $25 × 5.50% = $1.375 a year for the next five years. If the five-year yield were 1.00% instead, the new rate would be 3.50%, or $0.875 a year.

Why preferred prices move with interest rates

A perpetual preferred with a fixed dividend behaves like a long-term bond. Its price roughly equals the dividend divided by the yield investors demand:

Price ≈ annual dividend ÷ required yield

A $1.25 dividend priced at a 5.00% yield is worth $1.25 ÷ 0.05 = $25.00. If market yields rise and investors now demand 6.25%, the same dividend is worth $1.25 ÷ 0.0625 = $20.00, a 20% drop, even though the company is fine. Rate-reset preferreds have a different risk: when government bond yields fall, their dividends reset lower, which can push prices down too.

Liquidation order, with arithmetic

If a company fails, the general order of payment is:

1. Secured creditors (lenders with claims on specific assets)
2. Unsecured creditors, including most bondholders, then subordinated debt
3. Preferred shareholders, up to their liquidation value
4. Common shareholders, with whatever is left

Bankruptcy and insolvency laws (Chapter 7 and Chapter 11 in the US; the Bankruptcy and Insolvency Act and the CCAA in Canada) can produce negotiated outcomes, but this ranking is the starting point.

A worked example. Maple Widgets Inc. (hypothetical) is wound up. After secured lenders are paid, $500 million remains. It owes $350 million to unsecured bondholders, has 4 million preferred shares with a $25 liquidation value ($100 million total), and 50 million common shares.

	Case 1: $500M available	Case 2: $400M available
Unsecured bondholders	$350M (paid in full)	$350M (paid in full)
Remaining	$150M	$50M
Preferred shareholders	$100M ($25 per share)	$50M ($12.50 per share)
Remaining	$50M	$0
Common shareholders	$50M ($1.00 per share)	$0

A $100 million smaller recovery wipes out the common shareholders entirely and halves the preferred holders’ recovery, while bondholders are untouched. That is what “ranking” means in practice. The same logic is behind the comparison in stocks vs bonds.

Common vs preferred side by side

	Common shares	Preferred shares
Dividend	Variable, at board’s discretion	Stated rate, paid before common
Voting	Usually yes	Usually no
Upside	Unlimited	Mostly capped (unless convertible)
Liquidation	Last	Ahead of common, behind debt
Main price driver	Company’s growth and profits	Interest rates and credit quality

Convertible preferred shares

Some preferreds can be converted into common shares at a fixed ratio, at the holder’s option. They give the holder the preferred dividend and priority, plus a share in the upside if the common stock does well. In exchange, the dividend rate is usually lower than on a straight preferred. Companies use convertibles to raise money without issuing common shares at what they consider a low price. Venture capital investments in private companies are also commonly made through convertible preferred shares, with their own liquidation preferences.

A worked example (hypothetical). A $25 convertible preferred can be converted into 1.25 common shares and pays a 4% dividend ($1.00 a year).

• If the common shares trade at $16.00, the conversion value is 1.25 × $16.00 = $20.00, less than the $25 preferred value. Holders keep the preferred and collect the dividend.
• If the common shares rise to $24.00, the conversion value is 1.25 × $24.00 = $30.00. The preferred should trade near or above $30, because it can be turned into $30 of common shares.
• The break-even common price is $25.00 ÷ 1.25 = $20.00 per share.

When preferreds convert, the number of common shares rises, which dilutes existing common holders. That is one reason companies report “diluted” share counts alongside basic ones.

What can go wrong

• Preferred holders can still lose heavily. Dividends on preferreds can be suspended, and in a failure they can be wiped out after debt.
• Interest-rate risk. Fixed-rate preferreds lose value when yields rise; rate-reset preferreds can lose value when yields fall.
• Call risk. Issuers tend to redeem preferreds when it suits them (often when rates fall), capping your gain.
• Liquidity. Many preferred issues trade thinly, with wider spreads than common shares.
• Weak votes. In dual-class companies, public shareholders may have little say, even on major decisions.
• Yield isn’t safety. A high preferred yield often reflects higher credit risk. See the dividend yield entry.

The takeaway

Common shares are the ownership stake with the votes and the open-ended upside, and they come last in line. Preferred shares trade upside for a fixed dividend and a place ahead of common holders, which makes them behave more like bonds and sensitive to interest rates. Within common shares, dual-class structures can split economic ownership from control, which Canadian listing rules partly offset with coattail protections.

Related: What Is a Stock? · Stocks vs Bonds · Dividend Investing Explained