Preferred stock is a special kind of equity ownership, while bonds are a common form of debt issue. Many consider preferred stock an investment that lands in between common shares and bonds. Despite many similarities, preferred stock is generally riskier than a bond and tends to have higher yields to compensate for that. In the event of corporate bankruptcy proceedings and liquidation, bonds take preference over preferred stock when receiving payments.

Preferred Stock

Preferred stockholders have a claim to ownership of a corporation just like common stockholders. The structure and rights granted by preferred stock varies from company to company. Unlike common shares, preferred shares do not come with voting rights.

Preferred stock carries characteristics of fixed, dividend-paying securities such as bonds and offers appreciation and possible capital gains such as regular stock. In terms of the distribution of profits, preferred stock dividends are paid before common stock dividends. Additionally, most preferred shares have regularly occurring interest payments. These features make them a more attractive income investment than common shares.

Like bonds, preferred stock is generally callable at the company's option. This gives the issuer the right to call back the security during times of falling interest rates. Typically, the calling of preferred stock is followed by a reissuing of additional lower-yielding preferred stock. Most preferred stock is convertible into common shares.


Corporate bonds are debt instruments, or loans made to the company, which pay interest to the holder until the loan matures, at which point the face value of the bond is repaid. Bondholders do not enjoy voting rights like common shareholders, and they are also not entitled to any dividend payments. They are not owners and do not share in profits.

Bonds are issued at a certain face value, but their actual price in the market fluctuates based on a number of factors, including interest rates and the overall demand for loanable funds. In the event a corporation suffers financial hardship and is forced to declare bankruptcy, bondholders are paid back before any of the company's assets are distributed to shareholders. This feature makes bonds less vulnerable to default risk than other types of securities.

Bonds Vs. Preferred Stock

All bonds have a set maturity date, but this is not necessarily the case for preferred shares, although there are callable redemption dates. Preferred shares can theoretically last forever. However, the interest payments to bondholders are more secure than the dividend payments to preferred shareholders. A company may determine to suspend dividends during times of hardship or capital expansion, while bond payments must be made regardless of financial circumstance.

From an investor's perspective, bonds are safer but offer less upside than preferred stock. Preferred stock tends to have a lower par value and higher yields. It also tends to experience greater price volatility and be less secure than a bond.

  1. Why would a company issue preference shares instead of common shares?

    Learn about some reasons that corporations might issue preference shares, and why investors might value them more than common ... Read Answer >>
  2. What is the difference between preferred stock and common stock?

    Preferred stockholders have a greater claim to a company's assets and earnings than common stockholders, but may not have ... Read Answer >>
  3. What is the difference between preference and ordinary shares?

    Preferred shareholders have a higher priority claim to the assets of a corporation in case of insolvency than common shareholders. Read Answer >>
Related Articles
  1. Investing

    A Primer On Preferred Stocks

    Offering both income and relative security, these uncommon shares may work for you.
  2. Managing Wealth

    What You Need To Know About Preferred Stock

    Curious about preferred shares? Here's what you should know about these bond-like instruments.
  3. Managing Wealth

    The Different Between Preferred and Common Stock

    Preferred and common stocks are different in two key ways.
  4. Investing

    Valuation Of A Preferred Stock

    Determining the value of a preferred stock is important for your portfolio. Learn how it's done.
  5. Investing

    Prefer Dividends? Why Not Look At Preferred Stock?

    Preferred stock is an under-used option for income-seeking investors.
  6. Investing

    The True Risks Behind Preferred Stock ETFs (PFF, FPE)

    Consider the risks of investing in preferred stocks, including lack of diversification and sector risks in preferred stock ETFs.
  7. Investing

    Looking for Yield? Check Out This Preferred Stock ETF (PFF)

    Take a look at a review of the performance of the most popular preferred stock ETF, the iShares U.S. Preferred Stock ETF from BlackRock.
  8. Managing Wealth

    An Example of Dividends in Arrears

    Learn about the concept of dividends in arrears and which shares of stock guarantee payment of accrued dividends even if the company doesn't turn a profit.
  9. Investing

    Preferred Stock ETFs With Huge Dividends

    If you prefer huge dividend yields, you might want to consider having a preferred stock ETF in your portfolio.
  1. Preferred Stock

    A class of ownership that has a higher claim on assets and earnings ...
  2. Preferred Dividend

    A dividend that is accrued and paid on a company's preferred ...
  3. Participating Preferred Stock

    A type of preferred stock that gives the holder the right to ...
  4. Cumulative Preferred Stock

    A type of preferred stock with a provision that stipulates that ...
  5. Callable Preferred Stock

    A type of preferred stock in which the issuer has the right to ...

    Shares are a unit of ownership of a company that may be purchased ...
Hot Definitions
  1. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  2. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  3. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  4. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  5. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  6. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
Trading Center