Common vs preferred stock: is the cheaper share a better deal?

What can you receive or vote on as a shareholder?

When a company asks its owners to vote on a decision, the shares they hold may carry a vote. That is a voting right. When the company distributes money to its owners, that payment is a cash dividend.

Preferred shares can give their owners priority over common shareholders for dividends or the distribution of remaining assets. The class terms set out what that priority covers. It does not turn the shares into a bank deposit or a promise to repay their purchase price.

The same dividend produces a higher yield at a lower price

Use a fictional company whose common shares cost ₩20,000 each and preferred shares cost ₩15,000. If both pay ₩1,000 per share, the same cash payment is a larger percentage of the lower price. That payment-to-price percentage is dividend yield. It describes neither the value of the other rights attached to the share nor whether its price will fall.

Assume a fictional company has paid an annual cash dividend of ₩1,000 per share on each of two classes. Use that same assumed amount in every row below. These are invented prices and distributions, not quotations or forecasts for any real security.

Calculate dividend yield by dividing the annual cash dividend on one share by the chosen share price and multiplying by 100. A trailing yield uses a past dividend. This makes the payment period and price date part of the meaning; the calculation cannot promise what the next dividend will be.

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The preferred share's first yield is 1,000 ÷ 15,000 × 100 = 6.666…%, rounded to 6.67%. Buying 100 shares would cost ₩1,500,000 and the assumed distribution would be ₩100,000. The same number of common shares would cost ₩2,000,000 and produce the same assumed cash distribution.

The third row keeps the same payment and lowers only the preferred share’s price. Dividing by a smaller price raises the yield, although someone who already owns the share has lost market value. A future cut in the dividend could also reduce the payment used in a later yield calculation.

A missing dividend or price is different from a known zero dividend. A yield cannot be calculated with a zero or missing price.

A yield of 8.33% can appear alongside an investment loss

Follow an owner who bought 100 of these preferred shares at ₩15,000 each. They later cost ₩12,000, and the owner has actually received ₩1,000 per share in dividends during that period. To find the result, combine what the shares are now worth with the cash received and compare that total with the money paid. Exclude taxes, fees and buying more shares with the dividends, called reinvestment.

The purchase cost was ₩1,500,000. The shares are now worth ₩1,200,000, and dividends received total ₩100,000. Combining both gives −₩200,000: 1,200,000 + 100,000 − 1,500,000. The holding-period total return is −13.33%, calculated as −200,000 ÷ 1,500,000 × 100.

The 8.33% figure divides by today's ₩12,000 price; that dividing amount is the denominator. Dividing that same dividend by the owner's ₩15,000 purchase price gives 6.67%, sometimes called yield on cost. Neither percentage includes the fall in share value. The −13.33% total return does, and it is a return over this assumed holding period, not a rate converted into yearly units, or annualized.

The lower share price in this example more than offsets the dividend received. Comparing classes by yield alone leaves that price change out.

Being paid first still depends on the money available to divide

Set the share prices aside for a separate example. The company has lawfully approved a total amount of cash to distribute as dividends, called the dividend pool. Assume all legal requirements for the payment are satisfied. There are 200 preferred shares and 1,000 common shares. The preferred class receives money first, up to ₩600 per share, and the common class receives whatever is left.

After receiving that first amount, the preferred class receives no extra share of the leftover money. This condition is called non-participating. If the available money cannot provide the full ₩600, the unpaid part does not carry into the next period. That condition is called non-cumulative. These are chosen rules for this example, not rules for every preferred share.

The maximum first allocation is 200 × 600 = ₩120,000. Each row below is an independent possible pool, not a sequence of consecutive dividend years. These terms are invented for this allocation example and differ from the ₩1,000 dividend assumption in the yield example.

With a ₩100,000 pool, each preferred share receives ₩500 and common shares receive nothing. The ₩100 shortfall against the preferred cap does not carry forward under the stated non-cumulative terms. With no pool, there is no payment to either class. The ₩600 cap is not a bond coupon or a guaranteed annual cash payment.

A cumulative condition can instead preserve an unpaid preferred amount to be considered in a later distribution. A participating class may receive more after its first allocation. Either change can alter what remains for common holders. Read the actual wording to see how it works: the word preferred alone does not settle either rule.

Liquidation priority and the assets left to distribute

Liquidation means ending a company’s business and settling what it owns and owes. Creditors are the people or organizations it owes money to; deal with their claims, applicable taxes and the costs of closing first. Only what remains for shareholders is the residual to divide here. This is a different situation from a dividend while the company is operating. Starting with all the company’s assets would overstate the money left for owners.

In another fictional arrangement, keep 200 preferred and 1,000 common shares, but give the preferred class a non-participating liquidation priority capped at ₩5,000 per share. Its total cap is therefore ₩1,000,000. This is a separate liquidation assumption, unrelated to the dividend cap above or the price someone paid for the shares.

If only ₩600,000 remains after those obligations, the preferred class cannot receive its full ₩1,000,000 cap, even though common shareholders receive nothing. No residual means no payment to either class. Priority over another ownership class tells you the order of payment; it does not create enough money to repay what someone spent buying the shares.

Class terms and trading conditions behind the price gap

Find the precise share class and its rules. The articles are the company’s formal governing document; the issue terms describe the conditions attached when those shares were created. Look for how the dividend is calculated, whether unpaid amounts carry forward, whether preferred holders share in extra distributions and what voting rights they have. A dividend preference does not automatically include the separate liquidation preference in our example.

Redemption means the company retires the shares in exchange for the payment specified by their terms. Conversion means exchanging them for another type of share. If either is allowed, read who can initiate it, when it can happen, and how the payment or share exchange is calculated. Those features are not present in every preferred class.

A redemption provision does not by itself promise that you can cash out at your purchase price whenever you wish.

A price displayed on screen may be the last completed trade, not a price available for your whole order now. Few waiting orders or a wide gap between buyers’ offered prices and sellers’ asking prices can make that difference larger. The preferred class can trade below the common class for an extended time. That price gap is not money someone has promised to pay back to preferred holders later.

A price for one share describes only that piece of ownership. The two classes can contain different numbers of shares and carry different payment rights, so one lower price alone cannot value the entire company. Ratios comparing price, company profit and the recorded assets left for owners also need matching class inputs. PER, PBR and ROE explains those calculations; simply substituting a preferred price for a common price may mismatch the rights. For a new share issue, likewise identify the class and rights being created.

A yield calculation becomes more informative when its assumed payment and price are clear. Choosing a class still requires more than that ratio, which cannot establish its future total return.

There is no single set of preferred-share terms that applies to every company and country. For Korean companies, the Commercial Act and the rights set out in the company's articles of incorporation, its formal governing rules, matter. A general description of preferred stock cannot establish the rights of a particular share class.

Korea's Commercial Act permits classes with different rights and requires relevant class terms to be set out in the articles. Article 344-2 addresses dividend and residual-asset distribution terms; Article 344-3 addresses voting restrictions and any stipulated conditions for exercising or reviving voting rights. A missed preferred dividend does not automatically restore voting rights in every case. The provisions for that class determine what happens.

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Sources and assumptions

• Korean Commercial Act, Article 344: classes of shares — statutory framework for differing class rights and their specification in the articles of incorporation.
• Korean Commercial Act, Article 344-2: classes concerning profit and residual-asset distributions — the dividend and residual-asset distribution terms that must be specified. The linked statutory text is in Korean.
• Korean Commercial Act, Article 344-3: classes concerning voting rights — restrictions and stipulated conditions for exercising or reviving voting rights, where provided. The linked statutory text is in Korean.

The Korean class-rights explanation uses the Commercial Act provisions above, in the version effective 10 September 2026. The actual rights also depend on the company’s articles and issue terms; these examples do not establish a particular issuer’s obligations.

All prices, share counts, dividends, cash pools, liquidation amounts and four tables are fictional. The yield, dividend-allocation and liquidation models have separate stated assumptions. Amounts are in Korean won; taxes, fees and reinvestment are excluded, and percentage results are rounded only after calculation. No particular share class is recommended. See our editorial policy.