Comparing Preferred Stock & Common Stock
Companies can issue both preferred stock and common stock. Often a company will issue both types of stock, and both stock types will be available for investors to purchase on the stock market. When an investor is considering making a purchase of stock, the investor should consider the advantages and disadvantages of both preferred stock and common stock and how each type of stock will fit in with the investor's investment plan before making a purchase decision.
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Similarities
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Whether an investor purchases preferred shares or common shares, he is an owner of the company that issued the stock. Preferred and common shares also can be bought and sold easily in the stock market at any time. To encourage investors to purchase stock, companies will issue dividends on the stock. Dividends are a feature of owning preferred and common stock.
Differences
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Preferred stock holders are paid a dividend at regular intervals while common share holders receive dividends when the board of directors decides to pay dividends, and preferred share holders receive their dividends first. Preferred dividends are usually a stated amount while dividends paid to common shareholders could vary depending on the company's current dividend policy. Since preferred stock provides investors with regular income, preferred stock prices are more stable than common stock prices. Both types of stock represent a share of ownership in the company, but preferred shareholders do not have voting rights unless preferred share holder dividends have not been paid for a specified period of time. Finally, if a company declares bankruptcy, a preferred stock holder is ahead of a common stock holder for claims to the company's assets. A common shareholder must wait until all creditors, debt securities holders, and preferred share holder claims are met.
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Advantages
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Common stock is most often purchased for capital appreciation because investors might be able to sell the stock at a higher price than what they purchased it for. As a secondary advantage, when the stock rises in value, the dividends paid on the stock can increase depending on the company's dividend policy. Preferred stock is often sought by investors who are more cautious and would like fixed earnings, which is provided by the fixed dividend.
Disadvantages
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When an investor purchases stock, they need to consider the fact that they are not creditors of the company nor do they own any debt on the company. This means that the shareholders are the last to be paid any money they are owed if the company goes bankrupt, whether they are preferred or common shareholders.
Considerations
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Preferred stock is often issued when the stock market is declining. When the stock market falls, investors want to invest in more secure investments. Preferred shares meet this need as they offer investors fixed dividends.
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References
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