Preferred Stocks and Common Stocks: Similarities
Both are equity instruments that pay dividends from the company's after-tax profits.
Preferred Stocks and Common Stocks: Differences
Preferreds have fixed dividends and, although they are never guaranteed, the issuer has a greater obligation to pay them. Common stock dividends, if they exist at all, are paid after the company's obligations to all preferred stockholders have been satisfied.
This is where preferreds lose their luster for many investors. If, for example, a pharmaceutical research company discovers an effective cure for the flu, its common stock will soar, while the preferreds in the same company might only increase by a few points. The lower volatility of preferred stocks may look attractive, but preferreds will not share in a company's success to the same degree as common stock.