What’s the Difference Between Common and Preferred Shares?

Common and preferred shares are two types of equity investments, each offering different benefits. Understanding their differences helps investors choose based on income needs, risk appetite, and long-term goals.

Common shares, also known as equity shares, represent a unit of ownership in a company. Investors who hold common shares are entitled to a portion of the company's profits through dividends and have the right to vote on key corporate matters such as electing the board of directors.

These shares are publicly traded on stock exchanges and are influenced by market dynamics, company performance, and investor sentiment. In the event of company liquidation, common shareholders are paid only after all debts and obligations (including preferred shareholders) are settled.

Common shares are often seen as a long-term growth-oriented investment, offering capital appreciation along with voting privileges.

Preferred shares (called preference shares under Indian corporate law) are a special class of stock that comes with certain privileges compared to common stock. These include priority dividend payments and preferential treatment in case of liquidation. However, they typically do not offer voting rights.

Preferred shares behave similarly to fixed-income instruments, offering more predictable income through fixed dividends. They are less volatile than common shares and are often favoured by income-seeking investors.

There are different types of preferred shares, such as:

• Cumulative: Accumulate unpaid dividends
  

• Non-cumulative: Do not carry forward unpaid dividends
  

• Convertible: Can be converted into common shares under certain conditions
  

• Participating: Offer extra dividends under specific scenarios

The table below outlines the fundamental distinctions between the two types of equity instruments:

Choosing between common and preferred shares depends on your goals. Common shares are ideal if you want long-term growth, capital gains, and voting rights. Preferred shares work better for those who prefer steady income, lower risk, and priority in dividends. Your risk tolerance and investment timeline should guide the decision.

Both common and preferred shares serve different purposes—common shares for growth and control, preferred shares for stability and income. Pick the one that aligns with your financial objectives.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.