In terms of risk, how do common shares compare to preferred shares?

Common shares are considered riskier than preferred shares primarily because of their position in a company's capital structure. When a company faces financial difficulties, preferred shareholders are prioritized over common shareholders in terms of dividend payments and during liquidation. This means that if a company goes bankrupt or faces severe financial distress, preferred shareholders are more likely to recover some of their investment before any assets are distributed to common shareholders.

Additionally, common shareholders have voting rights and a potential for greater capital appreciation, but this also comes with increased volatility and a lack of guaranteed income, as dividends are not required and can be suspended if the company decides to reinvest profits or faces cash flow issues. Consequently, the inherent uncertainty in common shares, combined with their subordinate claim on assets and earnings, underscores why they are viewed as riskier compared to preferred shares.