What is preferred stock?

Preferred stock is a form of security issued by certain corporations. Unlike common stock, preferred stockholders don't have an economic interest in the business's future earnings but are guaranteed a certain amount of income. Preferred stockholders are ahead of common stockholders when it comes to a claim on a company's assets but are behind bondholders and other creditors.

Is it good to buy preferred stock?

Preferred stock can be an excellent income investment as long as you understand the risks and rewards. It can be a great way to get a higher income stream than you'd get from comparable bond investments, but be aware that in case of bankruptcy or liquidation, preferred stockholders are subordinate to bondholders and other creditors. So, it's wise to only buy preferred stock issued by companies that have very little chance of running into serious financial trouble.

What does 7% preferred stock mean?

A preferred stock's yield is based on the par value (initial value) of its shares, not its current trading price. If a preferred stock has a par value of $25 per share (like most do), this would mean that shareholders would get $1.75 (7%) in dividend income per share each year.

What are the types of preferred stock?

There are several different types of preferred stock.Cumulative preferred stock means that unpaid dividends must be paid at a future payment date.Noncumulative preferred stocks can skip a payment if needed without having to pay it later.Convertible preferred stock can be exchanged for common shares at a predetermined exchange rate.Callable preferred stocks can be bought back by the issuing company at certain dates.Perpetual preferred stocks don't have a maturity or call date.

Preferred Stock: Overview and Example

What Are Preferred Stocks?

By Matthew Frankel, CFP – Updated Jul 3, 2025 at 10:55 AM EST | Fact-checked by Frank Bass

Key Points

Preferred stocks provide fixed-income like dividends but lack long-term value growth.
They are riskier than bonds as they are subordinate in asset claims during bankruptcy.
Preferred stocks can be traded on exchanges and are accessible via ETFs or individual purchases.

Preferred stocks are a type of security with many qualities of fixed-income investments (bonds), but they aren't the same thing. Although they have some characteristics of bonds, they also trade on major exchanges like common stocks. Even so, they are an entirely different type of investment than either of those.

With that in mind, here's an overview of preferred stocks, how they work, and what investors should know before considering them. We'll also discuss whether it's better to buy individual preferred stocks or invest through index funds.

Loading paragraph...

Hands typing on a keyboard. — Image source: Getty Images.

Loading image...

Loading paragraph...

5 Most Undervalued Stocks to Buy in 2026

These blue chip stocks offer quality and long-term value for savvy investors looking to enhance their portfolios.

Best Growth Stocks to Buy in 2026

Make money by identifying growth stocks, companies poised to grow faster than the market or average business in their industry.

Is Common Stock an Asset or a Liability on a Balance Sheet?

Assets or liabilities? We explain accounting for common stock.

Loading hub_pages...

Loading paragraph...

Preferred stock FAQ

Loading faq...

About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

TMFMattFrankel

@MattFrankelCFP

Wells Fargo is an advertising partner of Motley Fool Money. Matt Frankel has no position in any of the stocks mentioned. The Motley Fool recommends Seritage Growth Properties. The Motley Fool has a disclosure policy.