These shares aren’t common

Q: What exactly is a preferred stock?

A: Common stocks are what you generally think of when you hear the word “stock.” They represent a share of equity in the underlying company, and their share prices and dividends can go higher or lower depending on how profitable the company is.

On the other hand, a preferred stock is more akin to a bond. Companies issue preferred stock to raise capital and agree to pay investors a certain interest rate. The rate can either be fixed or variable and is based on the preferred stock’s par value — usually $25. It’s important to note, however, that the share price fluctuates over time.

Most preferred stocks are issued by financial sector companies, such as banks, but it’s not uncommon for preferred stocks to be issued by companies in other industries.

There are a few key differences between preferred stocks and bonds. One advantage is that preferred stocks trade on major stock exchanges and generally are more liquid investments. They also are more accessible for smaller investors, as bonds typically sell in $1,000 increments.

A potential downside of preferred stock? Shareholders are lower in priority than bondholders ( but higher than common stockholders) should the company go bankrupt. For this reason, preferred stocks typically pay higher interest rates than bonds issued by the same company.