Two shares of the same company: one can raise its hand at the shareholders' meeting, the other cannot. In return, the one that stays silent gets paid dividends first, and usually more. In Korea's market, shares marked with 'u' (u, 우, meaning preferred) after the company name give up voting rights in exchange for dividend priority, and new-type preferred shares are designed to pay roughly 1% of par value above the common dividend. Yet preferred shares still trade cheaper than common shares in most cases. This mismatch between higher dividends and a lower price is what the market calls the price gap, or the 'preferred stock discount.' According to Hankyung Saenggle, preferred stock lacks voting rights but holds priority in dividend distribution.
A preferred share is one that swaps the right to vote for cash dividends, and the market prices that swap through the discount gap.
What separates preferred from common stock
Common stock is the most basic class of shares. It carries voting rights, letting holders vote on director appointments, mergers, and charter changes at the shareholders' meeting. Preferred stock, in principle, has none of this. Instead, it ranks ahead of common stock when dividends are paid, and it also gets priority in the distribution of residual assets if the company is liquidated.
The reason preferred shares pay more is straightforward: the extra dividend compensates for surrendering the vote. Korean preferred shares typically add 1% of par value to the common dividend. For a share with a 5,000-won par value, that means an extra 50 won per share on top of whatever the common share receives. As long as the company pays dividends, preferred holders always receive at least as much as common holders.
Common stock vastly outnumbers preferred stock in issuance. At one large electronics maker, common shares make up about 87.9% and preferred about 12.1%. Thin float means thin trading, which is the root of the price gap discussed below.
Old-type and new-type (uB) preferred shares
Korean preferred shares differ by issuance date. Old-type shares issued before the 1996 commercial law revision had no minimum dividend rule; new-type shares issued afterward carry a 'B' after their name. The Wikipedia entry on preferred stock notes that new-type preferred shares are generally issued with a 3-to-5-year term and a minimum dividend rate. Tickers like 'Hyundai Motor 2uB' fall into this group. A minimum dividend rate promises that if the company profits, it will pay at least that ratio, lending bond-like stability.
Why does a preferred share that pays more cost less?
The market calls the price difference between common and preferred shares the discount gap. The math is simple: (common price minus preferred price) divided by common price, times 100. The larger the figure, the deeper the preferred discount.
Three causes drive the gap. First, preferred shares carry no vote, so the control premium attaches only to common shares, pushing the preferred price lower. Second, the float is small; thin trading widens the bid-ask spread and adds a liquidity penalty. Third, thin trading means small sums can swing the price sharply.
This is where the dividend-yield paradox appears. A preferred share pays more yet costs less, so on a dividend-to-price basis its yield far outruns the common share. Below is an illustrative calculation built on the source structure (5,000-won par value, preferred adds 1% of par, or 50 won, to the common dividend), assuming a 20% price gap.
| Item | Common | Preferred (example) |
|---|---|---|
| Share price (won) | 10,000 | 8,000 |
| Dividend per share (won) | 300 | 350 |
| Price gap (%) | base | 20.0 |
| Dividend yield (%) | 3.00 | 4.38 |
These figures are an example combining the source's dividend structure. Adding 1% of par (50 won) to a 300-won common dividend gives a 350-won preferred dividend; apply a 20% cheaper price and the yield jumps from 3.00% to 4.38%. Under the same company and the same dividend policy, what you hold changes your realized yield by more than a full percentage point. The wider the gap, the wider the spread.
The choice is not what to buy but what you want
Choosing between preferred and common stock narrows to two questions. Do you need a voice in management, or would you rather give up that voice for a thicker dividend cash flow? Voting power matters most when a stake is large. For a small holder, the practical weight of a single vote is limited, which is one reason many see it that way, though the judgment depends on purpose and scale.
Conversely, a wide gap signals a dividend-yield advantage for the preferred share and, at the same time, warns of thin liquidity and larger price swings. Too narrow a gap dilutes the preferred dividend edge; too wide a gap demands tolerance for trading risk. The indicators below are not buy or sell signals for any specific stock but a checklist for examining the structural difference yourself.
- Price gap: compute (common minus preferred) over common to see whether today's discount is wide or narrow versus its own past average
- Yield spread: calculate the dividend yield of the same firm's common and preferred shares to see the actual gap in percentage points
- uB status and minimum dividend: for new-type shares, check the minimum guaranteed dividend and whether a term is set
- Volume and float: check that the preferred share's listed count and daily volume are not so thin as to hurt you when trading
- Dividend durability: even with a minimum rate, confirm the company has actually profited and kept paying