Preferred Stock vs. Common Stock
Preferred stocks and common stocks are both types of stocks that investors can buy, but they have different purposes and the differences between them are important to understand before investing in either. Both types of stock represent ownership in a company and can potentially provide investors with a return on investment.
What is Preferred Stock?
Preferred stock is a type of stock that has priority over common stock when it comes to the company’s assets and earnings. It provides its holders with a higher claim to the company’s assets in comparison to common stockholders. This is why preferred stocks are said to be “preferred” over common stock. Preferred stocks come with certain rights and privileges not available to common stock owners, making them a more attractive investment for some investors.
Some key features of preferred stock include:
• Dividend Payments: Preferred stocks normally pay dividends on a regular basis, although the amount of the dividend can vary from company to company. The dividend is usually fixed and will not be affected by the company’s performance.
• Low Risk: Preferred stocks are generally considered to be less risky investments than common stocks, because the issuer is obligated to pay the dividend regardless of the company’s performance.
• Liquidity: Preferred stocks are typically more liquid than common stocks, meaning they can be bought and sold easily.
• Voting Rights: Unlike common stocks, preferred stocks do not normally have voting rights.
• Convertibility: Preferred stocks can sometimes be converted into common stocks.
What is Common Stock?
Common stock is the most common type of stock offered by companies and is the type of stock that most people are familiar with. Common stocks are usually the riskiest type of stock, since they do not come with the same protections or preferences as preferred stocks.
Some key features of common stock include:
• Dividend Payments: Common stocks typically do not pay fixed dividends like preferred stocks do, but rather can pay variable dividends that depend on the company’s performance.
• Risk: Common stocks are generally considered to be more risky investments than preferred stocks, since the dividend payments that common stock holders receive are dependent upon the company’s performance.
• Voting Rights: Common stockholders have voting rights, which allows them to vote on important decisions regarding the company’s operations.
• Convertibility: Unlike preferred stocks, common stocks cannot be converted into other types of securities.
Advantages and Disadvantages of Preferred Stock and Common Stock
Preferred stock and common stock each have advantages and disadvantages for investors when compared to the other.
Advantages of Preferred Stock
• Higher Claim to Assets: Preferred stocks have a higher claim to the company’s assets than common stocks in the event of liquidation.
• Fixed Dividend Payments: Preferred stocks provide investors with consistent dividend payments, even if the company does not perform well.
• Greater Liquidity: Preferred stocks are usually more liquid than common stocks, making it easier to buy and sell.
Disadvantages of Preferred stock
• No Voting Rights: Preferred stockholders do not have voting rights, which gives them no direct control over the company’s operations.
• Price Volatility: Despite their fixed dividends, preferred stocks can still be subject to price volatility due to other factors.
Advantages of Common Stock
• Voting Rights: Common stockholders have voting rights and can influence important decisions made by the company.
• Greater Potential for Returns: Since dividend payments are dependent on the company’s performance, common stockholders can potentially benefit from greater returns if the company does well.
Disadvantages of Common Stock
• Lower Claims to Assets: Common stockholders have a lower claim to the company’s assets than preferred stockholders.
• Variable and Unpredictable Dividends: Common stockholders cannot depend on consistent dividend payments, since the amount of dividends they receive depends on the company’s performance.
Preferred stock and common stock are both viable investments, each carrying their own advantages and disadvantages. Before investing in either, investors should consider their own goals and risk tolerance and do research on the specific stocks they are considering. Understanding the differences between preferred stock and common stock can help investors make more informed decisions and be more successful in achieving their investing goals.
