Common Vs. Preferred Stock: What’s the Difference?

Understanding the types of stocks available is crucial when investing in the stock market.  A common comparison is common vs. preferred – the two primary types on offer.  Each offers different rights, benefits, and potential risks.

What is Common Stock?

Common stock is the most prevalent type of stock issued by companies and represents ownership in a corporation.  Holders of common stock typically have voting rights, usually one vote per share, which they can exercise in corporate decisions, primarily in electing the board of directors.

Benefits of Common Stock:

• Voting Rights: Shareholders can influence the company’s policies and management decisions through their voting rights.
• Capital Gains: Common stocks often have the potential for substantial price appreciation.
• Dividends: While dividends are not guaranteed, companies may pay dividends to common stockholders from their profits.

Risks of Common Stock:

• Volatility: The value of common stocks can be highly volatile.
• Subordinate Status: In the event of liquidation, common shareholders are the last to be paid, after creditors and preferred shareholders.

What is Preferred Stock?

Preferred stock is a type of stock that provides some features of both equity and debt.  Preferred shareholders typically do not have voting rights, but they enjoy a higher claim on assets and earnings than common shareholders.

Benefits of Preferred Stock:

• Fixed Dividends: Preferred stocks usually offer fixed dividends, making them similar to bonds.
• Priority Over Common Stock: In case of bankruptcy, preferred stockholders are paid before common stockholders.
• Convertible Options: Some preferred stocks can be converted into a predetermined number of common shares, giving the holder the potential for price appreciation.

Risks of Preferred Stock:

• Less Upside Potential: Since dividends are typically fixed, preferred stocks generally have less price appreciation potential than common stocks.
• Callability: Many preferred issues are callable, meaning the issuing company can repurchase them at a predetermined price, which can limit gains for investors.

Conclusion

Investors choose between common and preferred stocks based on their investment goals, risk tolerance, and desired income stability.  Common stocks are suitable for those seeking growth and having a higher risk tolerance, while preferred stocks are preferable for those seeking income and lower volatility.  Understanding these differences is crucial for making informed investment decisions in the stock market.