What distinguishes preferred stock from common stock?

Preferred stock is primarily distinguished from common stock by the priority it holds in receiving dividends. When a company declares dividends, holders of preferred stock are paid before common stockholders. This means that if a company is distributing profits, preferred stockholders typically receive their fixed dividends before any dividends are paid to common stockholders.

This characteristic makes preferred stock similar to a bond; it typically offers a set dividend rate and lacks the volatility of common stock, which can experience fluctuations in value and dividend payouts based on the company's performance.

In contrast, common stockholders may benefit from increased dividends during profitable periods, but they are not guaranteed to receive any dividends at all. Additionally, common stockholders generally have voting rights and greater exposure to the company's growth potential, though they are last in line to be compensated in the event of the company's liquidation. Overall, the preferential treatment in dividends is a key factor that sets preferred stock apart from common stock.