Common vs. Preferred stocks: Which should you buy in 2025?
Choosing between common and preferred stocks is one of the most fundamental decisions U.S. investors face—especially in a year like 2025, when market volatility, interest rates, and sector trends are shifting rapidly. Both types of stock represent ownership in a company, but they come with very different rights, risks, and rewards. Which is the better fit for your portfolio this year? This guide breaks down the differences, advantages, and drawbacks of each, and helps you decide which type aligns best with your investment goals.
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What are common and preferred stocks? 🤔
At their core, both common and preferred stocks are ways to own a piece of a company. But the similarities largely end there.
Common stock is what most people think of when they talk about “stocks.” It represents basic ownership, typically comes with voting rights, and offers the potential for unlimited price appreciation. Common shares are widely traded and are the main vehicle for long-term wealth creation in the stock market.
Preferred stock is a hybrid security—part equity, part bond. Preferred shareholders get fixed dividends and have a higher claim on company assets than common shareholders, but usually do not have voting rights. These shares are favored by investors who want steady income and lower risk.
Key differences: Common vs. preferred stocks ⚖️
Here’s a side-by-side comparison to clarify the distinctions:
Pros and cons of common stocks 📈
Advantages:
Unlimited growth potential: If a company performs well, common shares can appreciate dramatically, offering substantial long-term gains.
Voting rights: Common shareholders can vote on major corporate matters, including electing the board of directors and approving mergers.
Liquidity: Common stocks are highly liquid, traded in large volumes on major exchanges, making it easy to buy and sell.
Tax deferral: Capital gains taxes are only paid when shares are sold, allowing for tax-efficient growth.
Drawbacks:
Greater risk and volatility: Prices can swing sharply with market sentiment, company news, or economic changes.
Last in line for payouts: In bankruptcy, common shareholders are paid after all debts and preferred shareholders.
No guaranteed dividends: Dividends are paid at the company’s discretion and may be cut or suspended in tough times.
Pros and cons of preferred stocks 💵
Advantages:
Fixed, higher dividends: Preferred stocks typically pay steady, predictable dividends, often at higher rates than common shares or bonds.
Priority in payouts: Preferred shareholders get paid before common stockholders in both dividends and liquidation scenarios, reducing risk.
Lower volatility: Preferreds are less sensitive to market swings, making them attractive during turbulent periods.
Convertible options: Some preferred shares can be converted into common stock, offering upside if the company grows.
Potential tax advantages: In some cases, preferred dividends are taxed more favorably than bond interest.
Drawbacks:
Limited price appreciation: Preferred stocks rarely see big price jumps, as their value is tied to interest rates and dividend payments rather than company growth.
No voting rights: Most preferred shareholders cannot vote on company matters.
Interest rate sensitivity: Rising interest rates can cause preferred stock prices to fall, as new issues may offer higher yields.
Call risk: Companies can often “call” (redeem) preferred shares at a set price, limiting potential gains.
Dividend suspension risk: If a company faces financial trouble, it can suspend preferred dividends (especially for non-cumulative types).
Who should buy common stocks in 2025? 👩💼
Common stocks are best suited for:
Long-term growth investors: If your goal is to build wealth over years or decades, common stocks offer the highest upside.
Those with higher risk tolerance: You’re comfortable with price swings and can weather market downturns.
Investors who want a say: Voting rights matter if you want a voice in company decisions.
Younger investors: With time on your side, you can ride out volatility for greater long-term gains.
2025 Outlook:
With the U.S. market still driven by innovation, AI, and tech sector growth, common stocks remain the go-to for aggressive investors seeking capital appreciation. However, volatility is expected to stay elevated, so diversification and patience are key.
Who should buy preferred stocks in 2025? 🧓
Preferred stocks are ideal for:
Income-focused investors: If you want steady, predictable dividends, preferreds are a strong choice.
Retirees or near-retirees: Those needing reliable cash flow and lower volatility will appreciate preferreds’ stability.
Risk-averse investors: Preferreds offer more protection in downturns due to their payout priority and lower price swings.
Diversifiers: Adding preferreds can balance a portfolio heavy in common stocks or bonds, reducing overall risk.
2025 Outlook:
Preferred securities delivered strong returns in 2024, outperforming most fixed-income assets. In 2025, with interest rates and sector performance in flux, preferreds offer a compelling mix of yield and relative safety—especially in sectors like financials, utilities, and insurance.
Hybrid strategies: Can you own both? 🤝
Absolutely. Many investors blend common and preferred stocks to balance growth and income:
Core-satellite approach: Use common stocks for long-term growth and preferreds for steady income.
Sector diversification: Some sectors (like banks and utilities) issue more preferreds, while tech and growth companies focus on common stock.
Risk management: Preferreds can cushion a portfolio during downturns, while common stocks drive returns in bull markets.
Example:
A retiree might hold 70% preferred stocks for income and 30% common stocks for growth, while a younger investor might reverse those weights.
Key questions to ask before buying in 2025 ❓
What’s my investment goal? Growth, income, or a mix?
How much risk am I willing to take? Can I handle market swings, or do I prefer stability?
Do I need voting rights? Is having a say in company matters important to me?
How will interest rates affect my holdings? Preferreds are more sensitive to rate changes.
Am I diversified? Owning both types can help balance risk and reward.
The bottom line 📝
Buy common stocks if you want long-term growth, can handle volatility, and value voting rights.
Buy preferred stocks if you need steady income, lower volatility, and higher payout priority.
Blend both for a balanced approach, especially in uncertain markets.
No single answer fits everyone. Your age, goals, risk tolerance, and income needs should drive your choice. In 2025’s dynamic market, understanding these differences—and your own priorities—will help you make smarter, more confident investment decisions.
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Disclaimer: This article is for informational purposes only and does not constitute investment advice. Always conduct your own research and consider seeking professional financial advice before making any investment decisions.