Preferred shares vs common shares: Which investment should you choose?

When interest rates start to decline, many people realize that there are “other options” beyond common stocks, namely preferred shares—an important investment tool that is often overlooked.

So, what’s the difference? Which one suits you? Let’s clarify.

What are common stocks? Why are they risky but still popular?

Common Stock (Common Stock) is what people usually refer to when they say “stocks.” In fact, it represents ownership in a business—similar to betting on the company’s founders, sharing in both victories and losses.

What do you get?

Unlimited returns – This is the main appeal of common stocks. If the company grows, the stock price could increase tenfold, a hundredfold, or more, along with dividends that grow with profits. This is the power of capitalism at its best.

Voting rights – Common shareholders have the right to vote at meetings: 1 share = 1 vote. You can elect the board of directors and approve major decisions. You are a “true owner,” not just an investor.

But what about the risks…

This is the downside of common stocks – common shareholders are at the lowest level in the capital structure (Capital Structure).

If the company goes bankrupt, all assets are sold to pay “creditors” and “preferred shareholders” first. Whatever remains (if any) then goes to common shareholders. The bottom line? Your investment could disappear entirely in an instant.

What are preferred shares? And why are they “preferred”?

Preferred Stock (Preferred Stock) is a hybrid security—combining features of bonds (Bond) and common stocks (Stock).

Legally, preferred shareholders are owners of the company just like common shareholders, but in practice, they are akin to lenders—receiving steady cash flows in exchange for giving up control.

What are the advantages?

Dividends before common stock – When the company pays dividends, preferred shareholders are paid first, often at a “fixed rate” like 5% or 7% per year, similar to bond interest.

Principal repayment before common stock – In worst-case scenarios, the money is returned to preferred shareholders before common shareholders.

Types you should know

• Cumulative (Accumulated Dividends): If the company skips dividends in a year, the amount is “carried over” and paid in subsequent years.
• Non-cumulative (Non-accumulating): If dividends are missed, they are lost forever.
• Convertible (Convertible): Can be converted into common stock at a specified ratio.
• Callable (Callable): The company has the right to buy back after a certain period.

Clear comparison: What’s different, really?

Why do companies “prefer” issuing preferred shares?

Understanding the company’s perspective helps you grasp the game:

Maintain management control – Business owners want funds but don’t want voting power to dilute. Issuing preferred shares is the answer. Holders of these shares have no say in shareholder meetings.

Improve financial statements – “Preferred shares” are counted as equity (Equity), not debt. Thus, debt-to-equity ratios look better than borrowing.

Financial flexibility – Bond interest must be paid; missing payments is a default. But dividends on preferred shares? They can be deferred without causing bankruptcy.

Who should choose which type of stock?

1. Risk-takers (Trader/Speculator)

• Choose: Common stocks or CFDs on stocks
• Reason: High profit potential from price swings; volatility offers opportunities

2. Income-focused (Retiree/Income Seeker)

• Choose: Global ETF preferred stock funds or preferred share ETFs
• Reason: Fixed, steady dividends; reduced worry about principal loss

3. Long-term investors (Long-term Value Investor)

• Choose: Common stocks
• Reason: Grow alongside the business; compound profits over time

4. Sophisticated investors (Sophisticated Investor)

• Choose: Hybrid strategies (Hybrid Strategy)
• Reason: Mainly hold common stocks, hedge with derivatives/CFDs to manage risk

Lessons from real market events in Thailand

SCB restructuring: Changing the fate of SCB-P

Siam Commercial Bank (SCB) restructured to spin off SCBx—this event reveals risks often overlooked.

SCB-P holders had the chance to convert, but those “uninformed” or “hesitant” faced despair when the original SCB stock was delisted, becoming a non-listed stock that is hard to trade.

Lesson: Preferred shares are not permanent. Major corporate actions can reset shareholders.

KTB-P: The real liquidity trap

• KTB (Common Stock): Trades hundreds of millions daily; easy to find buyers
• KTB-P (Preferred Stock): Some days, volume is “0” or just a few dozen shares

If you buy KTB-P for dividends but need cash urgently—say, “unable to sell” or forced to sell at a loss because there are no buyers.

Lesson: Low liquidity is a major risk for Thai preferred shares.

RABBIT-P: The brutal, hellish conditions

RABBIT (formerly U City) preferred shares show complexity:

• Clear dividend terms but with conversion conditions 1:1 into common stock
• Voting rights are “normal”—1 share = 1 vote, but if dividends are fully paid, voting rights may be reduced to 1 vote to limit influence

This type requires careful calculation of “Conversion Parity”—not a game for amateurs.

Risks to watch out for

Liquidity Risk (Cannot sell)

Just because the price looks good doesn’t mean you can sell. Many Thai preferred shares have low trading volume.

Call Risk (Called back)

Most preferred shares are “Callable”—when market interest rates fall, the company may buy back shares and issue new ones at lower rates, causing you to miss out.

Interest Rate Risk (Rising rates cause price drops)

Preferred share prices move inversely to interest rates. When the Fed hikes rates or market rates increase, preferred share prices fall. Investors then prefer bonds.

Leverage Risk (Over-leverage)

Traders using leverage: leverage amplifies gains but also losses. Always use stop-loss orders.

Summing up clearly

Preferred Shares vs Common Stocks is not about “which is better,” but about “which suits you.”

• Want growth + accept volatility → Common Stocks
• Want steady dividends + stability → Preferred Shares
• But beware of liquidity, interest rates, and call risk of Thai preferred shares.

Study deeply, plan carefully, and wealth will be yours.