Common Stock Vs Preferred Stock

Key Highlights

• The common stock represents ownership in a company, which can offer high returns, but dividend payments are not guaranteed.
• Preferred stock pays a fixed dividend. Also, preferred stock receives dividends prior to common stock.
• Shareholders of common stock have voting rights, while shareholders of preferred stock do not.
• Despite not having voting rights, preferred stock is viewed as a safer investment option by some investors due to its stability.

What is Common Stock?

Common stocks are shares traded on the stock markets every day. In some cases, a company can issue only common shares without issuing other types of shares (such as preference shares). As a reward for owning shares of a company, investors receive dividends. But, it is not necessary for a company to pay dividends to its investors. In rare cases, companies may not pay dividends to shareholders at all.

Despite the company not paying dividends, stockholders can earn high returns over time. The stock market has the potential to create wealth over the long term. For common stocks, the risk-reward ratio is high. In other words, the risk level is as high as the potential return. The number of shares a shareholder owns affects the number of votes they have. By exercising voting rights, shareholders can elect members of the board of directors.

What is Preferred Stock?

Preferred stock offers more benefits than common stock but does not provide voting rights. Although preferred stock is still an ownership stake, it gives you different rights than common stock.

One of the main benefits of owning preferred stock is that it pays a fixed dividend. Dividends on preferred stock are usually fixed, unlike dividends on common stock, which fluctuate based on the performance of the company.

Also, preferred stockholders have priority over common stockholders when it comes to dividends. If a company reduces dividend payments, preferred stockholders will receive dividends first.

Voting rights are another key difference between common stock and preferred stock. Preferred stockholders do not have any voting rights, unlike common stockholders. Preferred stockholders will not have a say if a major decision needs to be made about the company.

Despite not having voting rights, preferred stocks are still popular among investors due to their relative safety. As preferred stock dividends are usually fixed, they provide a more stable source of income than common stock dividends. Investors seeking dividend income from their investments can find this to be very profitable.

Another benefit of preferred stock is that it often has a call feature. It means that the company can buy back preferred stock at a predetermined price. Now that we've discussed common stock versus preferred stock, what is the difference between common stock and preferred stock? Let's look at this in more detail.

What is the Difference Between Common Stock and Preferred Stock?

Despite the fact that both common stocks and preferred stocks are shares of ownership in the company, their characteristics and the rights and privileges they offer the shareholders are different. To make informed investment decisions based on their investment goals and risk tolerance, investors must understand the key differences between common stocks and preferred stocks.

Conclusion

Compared to preferred shares, common shares are more readily available. It ultimately depends on the investor's goals whether to buy common shares or preferred shares. Generally, people who buy common shares are interested in higher profits, but at a greater risk. On the other hand, people who buy preferred shares tend to be interested in regular dividend income and less risk.