Pros & Cons of Common Stock vs. Preferred Stock
Common and preferred stock are two different types of stock that a company can issue. As an investor, you need to understand the difference between these two types of stock because it can affect your investment drastically. Common stock is designed to help you benefit from capital appreciation while preferred stock is more about providing consistent dividends.
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Ownership
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Both common stock and preferred stock shares represent a portion of ownership in a company. Regardless of what type of stock you have, you are considered to be one of the owners if you have a share. Common stock is the type of stock that most investors are concerned with and trades most frequently on the stock exchange. Preferred stock is a different class of stock but it is bought and sold in much the same way as common stock.
Voting Rights
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One of the key differences between preferred and common stock is the voting rights. Even though both stocks are considered to be a portion of the ownership in a company, they do not typically carry the same voting rights. Common stock usually carries with it one vote for each share. Preferred stock does not carry with it any voting rights. This means that if you are interested in taking control of a company, or having a say in what goes on, common stock is what needs to be purchased.
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Dividends
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Both of these types of stock can receive dividends from the profits of a company. The way that the dividends are distributed differs from one class to another. With common stock, the dividends are essentially optional and they are voted on by the board of directors of the company. With preferred shares, stockholders typically receive a guaranteed dividend. Dividends have to be paid to preferred stockholder before they can be paid to common stockholders.
Claims
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If the company happens to go out of business, the shareholders in the company are entitled to some of the assets of the company. These two classes of stock have different levels of ownership rights as well. Preferred stock holders have a higher position than common stock holders when it comes to claiming the assets of a company that is being liquidated. This means that it is technically safer to be a preferred stockholder when the company goes out of business.
Value
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The value of these two types of stock is determined in different ways. With common stock, the value can fluctuate largely from one day to the next. It is based on market sentiment and other fundamental factors related to the company. Preferred stock typically does not fluctuate in value that much. This means that if you are the type of investor that wants to realize a large return on investment common stock would be the superior option.
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