What Are Preferred Shares?

What Are Preferred Shares?

Companies list their shares on exchanges to gain more traction towards themselves and become popular among the investing community, giving them easier access to capital.

However, not all shares of a company are made equal and distinctions between certain types of shares give traders advantages and privileges that other types of shares may not. 

In general, there are two types of shares available on an exchange - ordinary and preferred. 

Preferred shares give shareholders the ability to receive dividends before common stockholders, which also comes with added seniority in the case of bankruptcy proceedings and restructurings occuring in the issuing company. 

These privileges come at the expense of limited voting rights, as preferred shares are designed as financial incentives, rather than managerial instruments. 

Understanding the differences between common and preferred shares is crucial in identifying the stocks that best suit your portfolio to make the most of your investments.

If you are a beginner investor and would like to know more about what preferred shares are and how they work, this Investfox guide is for you. 

How Preferred Shares Work

As already mentioned, preferred shares are types of shares that give shareholders certain privileges over common stockholders. 

Furthermore, preferred shares are different in the way they operate. Some of the core features of preferred shares include:

  • Dividend Preference: Preferred shareholders receive dividends before common shareholders. These dividends are often fixed and specified in the share's terms
  • Limited Voting Rights: Preferred shareholders usually do not have the same voting rights as common shareholders. In some cases, they may have no voting rights at all
  • Fixed or Adjustable Dividends: Preferred dividends can be fixed (a set percentage of the share's par value) or adjustable based on certain financial conditions
  • Seniority: In the event of a company's liquidation or bankruptcy, preferred shareholders have a higher claim on the company's assets than common shareholders but are typically junior to bondholders
  • No Maturity Date: Preferred shares often have no maturity date, meaning they are a perpetual investment, but the company may have the option to redeem them at a predetermined price
  • Convertibility: Some preferred shares are convertible into common shares at the option of the shareholder

Preferred shares offer a trade-off between the stability of fixed income (due to their dividend preference) and the potential for capital appreciation like common stock.

They are commonly used by companies to raise capital without diluting existing common shareholders' ownership or voting rights.

Investors seeking a steady stream of income may find preferred shares attractive, but they should be aware of the specific terms and risks associated with each type of preferred stock.

Preferred Shares And Seniority 

When it comes to seniority, there is a hierarchy between financial securities that exists during bankruptcies and restructurings. 

The seniority between common and preferred shares and bonds for investors is as follows:

  1. Bonds: Bondholders have the highest seniority in a company's capital structure. When a company faces financial distress, bondholders are the first to be paid, and their claims are usually secured by specific assets or revenues of the company. Bondholders receive both interest payments and the return of the principal amount when the bond matures
  2. Preferred Shares: Preferred shareholders have a higher seniority compared to common shareholders but are junior to bondholders. In the event of financial distress or liquidation, preferred shareholders are entitled to receive their stated dividends before common shareholders receive any dividends. They also have a higher claim on the company's assets than common shareholders
  3. Common Shares: Common shareholders have the lowest seniority in the company's capital structure. They are at the bottom of the hierarchy when it comes to claiming a company's assets and earnings

Pros And Cons Of Investing In Preferred Shares

Preferred shares come with certain advantages and tradeoffs and investors need to carefully consider these factors to decide whether investing in them is the right course of action for their financial objectives. 


  • Dividend Priority: Preferred shareholders have a higher claim on a company's earnings and assets than common shareholders. They receive dividends before common shareholders, providing a more predictable income stream
  • Stability: Preferred shares often have fixed or adjustable dividend rates, which can provide a steady and reliable source of income, making them attractive to income-oriented investors
  • Potential for Capital Appreciation: While preferred shares are primarily income-focused investments, they can also appreciate in value over time, especially if interest rates decline or if the company's financial condition improves


  • Lack of Voting Rights: Preferred shareholders typically have limited or no voting rights, which means they have little influence over the company's management and decision-making processes
  • Interest Rate Risk: The price of preferred shares can be sensitive to changes in interest rates. If interest rates rise, the value of existing preferred shares may decline, affecting their resale value
  • Subordination to Bonds: Preferred shares are subordinated to bonds in the capital structure. In case of financial distress or bankruptcy, bondholders have a higher claim on the company's assets and income

Key Takeaways From What Are Preferred Shares

  • Preferred shares are types of shares that give shareholders privileges over common stockholders 
  • Preferred shareholders have a seniority over common stockholders, however, bondholders hold the highest seniority in bankruptcy proceedings and restructurings 
  • Unlike common stocks, preferred stocks are designed purely as financial instruments and give no voting rights to stockholders 
  • Preferred shares have fixed or adjustable dividends, making them more predictable than common stocks 

FAQ On Preferred Shares

How do preferred shares work?

Preferred shares represent an ownership stake in a company with characteristics of both stocks and bonds. They typically offer fixed or adjustable dividends and have a higher claim on company earnings and assets than common shares but limited or no voting rights. They are a source of steady income for investors.

Are preferred shares better than common stock?

Preferred shares and common stock serve different investor objectives. Preferred shares offer more predictable dividends but lack voting rights and potential for substantial capital appreciation. Common stock carries voting rights and potential for higher returns but with greater volatility and dividend uncertainty.

Can preferred shares be redeemed?

Yes, preferred shares can be redeemed, depending on the terms specified when they were issued. The issuing company may have the option to redeem the preferred shares at a predetermined price or date, providing an exit for shareholders.