Understanding Preferred Shares: A Complete Guide for Investors

When signals of the Federal Reserve’s interest rate cuts begin to appear, investors’ attention shifts back to a often-overlooked instrument: preferred shares. These are investment tools positioned between bonds and common stocks. While common stocks remain the main driver of long-term wealth creation, today we will explore their differences, risks, and how to choose the right investment tools aligned with your goals.

Preferred Shares vs. Common Stocks: Fundamental Differences Every Investor Must Know

When the investment world talks about “stocks,” most people think of common stocks, which represent true ownership in a company. Holding common shares is like being a full partner in the business—you share profits, risks, and decision-making power.

In contrast, preferred shares are hybrid instruments that borrow features from bonds, such as fixed dividends, and from stocks, such as being equity instruments. Legally, preferred shareholders are owners of the company, but in terms of financial management, they behave more like creditors with certain conditions.

The Advantage of “Preferred”: Who Gets Paid First

The clearest differences are in two key rights:

First Dividend Rights: Preferred shareholders always receive dividends before common shareholders, often at a fixed rate, such as 5% or 7% of face value. This is akin to receiving bond interest.

Priority in Liquidation: In the worst-case scenario, if the company dissolves, proceeds from asset sales are used to return capital to preferred shareholders first. Common shareholders only get what’s left, if anything.

Control and Risks: The Trade-Off

Trade-offs are about loss. Common shareholders have voting rights—each share equals one vote—allowing them to elect directors, approve capital increases, and influence company policies.

Most preferred shareholders lack voting rights or have limited rights on special matters. Whether this trade-off is fair depends on your perspective, but it’s a clear contractual arrangement.

Preferred Shares Are More Complex Than You Think: Types and Conditions

In reality, preferred shares are not a single uniform instrument. There are many types, each with different conditions:

Cumulative Preferred Shares: If the company skips dividends in a bad year, unpaid dividends accumulate and must be paid first in subsequent years before any dividends are paid to common shareholders. This provides a layer of protection for investors.

Non-Cumulative Preferred Shares: If dividends are skipped, the unpaid amount is lost; there’s no obligation to make up for missed payments. This is riskier.

Convertible Preferred Shares: These give the holder the right to convert into common stock at a set ratio, allowing investors to benefit from potential upside if the company performs well.

Callable Preferred Shares: The issuer reserves the right to buy back these shares after a certain period (e.g., 5 years). This often happens when market interest rates fall, and the company wants to refinance at lower costs.

Comparison Table: The Main Differences

Why Do Companies Issue Preferred Shares? Financial Strategy

This environment may seem safe for investors, but from a management perspective, why do companies favor issuing preferred shares?

Protection Against Dilution of Control: Founders needing capital but wanting to maintain control issue preferred shares, which do not carry voting rights.

Improve Financial Ratios: From an accounting standpoint, preferred shares are recorded as “equity,” not “debt,” improving debt-to-equity ratios compared to borrowing.

Financial Flexibility: Bond interest must be paid on schedule; failure results in default. Dividends on preferred shares can often be deferred if necessary, providing a buffer.

How to Choose Assets That Match Your Investment Style

There’s no “best” investment instrument—only the one most suitable for your goals and mindset. Here’s a decision framework:

Style 1: Trader/Speculator
You enjoy volatility, can tolerate high risk, and seek short-term profits from price differences.
What to do: CFD trading on common stocks or via platforms like Mitrade that allow leverage.
Why: High volatility offers profit opportunities; leverage amplifies returns; short selling enables profit in down markets.

Style 2: Income/Retiree
You want steady cash flow for monthly expenses, without monitoring markets all day.
What to do: Global ETFs or preferred stock funds, or solid bank preferred shares.
Why: Focus on safety of principal and predictable dividends—similar to fixed deposits but better.

Style 3: Long-Term Value Investor
You plan for 5-10 years, believe in the growth of your chosen companies, and can tolerate market fluctuations.
What to do: Common stocks.
Why: You want to grow with the company; dividends are secondary; the main goal is compounded gains over years.

Style 4: Sophisticated Investor
You have deep knowledge of portfolio management and want to reduce risk.
What to do: A mix—hold common stocks as a core, and use derivatives or CFDs via Mitrade for hedging.
Why: Capture growth while protecting against downturns.

Lessons from the Real Market: Risks Investors Often Overlook

Many seemingly simple issues are hidden behind preferred shares:

Case: SCB-P – When Structural Changes Occur

SCB (Siam Commercial Bank) restructured by exchanging existing SCB shares for SCBx at 1:1 to unlock tech business.
For SCB-P holders: The bank offered conversion, but those unaware or late missed the news. The original SCB shares were delisted, becoming hard-to-trade assets.
Lesson: Preferred shares may become illiquid or delisted after major corporate actions; quick action is essential.

Case: KTB-P – The Liquidity Trap

KTB (Krung Thai Bank) has common shares and preferred shares (KTB-P).
Common shares are actively traded; preferred shares may have days with zero or very low volume.
If you see high dividends and buy large amounts, you might find yourself unable to sell quickly or at a fair price.
Lesson: Liquidity risk is the top concern for preferred shares in Thailand.

Case: RABBIT-P – Complexity

RABBIT (formerly U City) preferred shares have complex conditions—such as a conversion clause allowing conversion to common stock at 1:1 in 2023, but only if dividends are paid fully.
If dividends are paid, voting rights may decrease.
Lesson: Not all preferred shares are the same; some have hidden conditions requiring careful analysis.

Risks You Must Face

Before investing, accept these risks:

Liquidity Risk: The biggest enemy—may be impossible to sell or require a long wait for a buyer.

Call Risk: When market interest rates fall, companies may call back high-dividend preferred shares to refinance at lower costs, causing you to lose future income.

Interest Rate Risk: Preferred share prices move inversely to interest rates. When rates rise, prices fall, prompting investors to sell and buy bonds with better yields.

Leverage Risk: Trading CFDs with leverage amplifies both gains and losses. Always use stop-loss orders.

Conclusion: Make Wise Choices

Deciding between preferred shares and common stocks isn’t about finding the “best” instrument but choosing what best fits your profile. If you seek growth and ownership, common stocks are suitable. If you prefer steady income, safety, and less market monitoring, preferred shares are your choice.

The investment world is expanding daily. Don’t confine yourself to old frameworks. Study thoroughly, plan carefully, use appropriate tools, and wealth will follow.