Common Stock Vs. Preferred Stock Vs. Bonds

Many people want to invest, but they don't know what type of investment to choose. The terms for different types of investments confuse them. The reasons for investing in each type also vary. Stocks and bonds differ because bonds are actually a loan to the company, and stocks are ownership in the company. There is also a difference between the common and preferred stocks.

  1. Dividends

    • Preferred stock gets paid dividends first if the company makes money. Common stock makes money from dividends after the preferred stockholders receive payment.

    Interest

    • Bonds receive interest payments just like any loan. These interest payments receive first priority and are in a specific amount.

    Value

    • Bonds pay face value when they come due. Until that point, they trade according to the market. Stocks vary in price with the market, but preferred stock may have a par value equal to the original amount invested in the event of liquidation of the company.

    Liquidation

    • Bonds receive preferential treatment for payment on liquidation of the company. Next in line are the preferred stock and finally the common stock.

    Growth

    • All stock has the potential to grow or drop in value. Common stock tends to have a higher potential than preferred. Bonds may grow in value or drop, but pay out face value when due.

    Taxation

    • Dividends from stock get preferential tax treatment if they come from American companies. Taxes on interest from bonds are at the holder's tax rate.

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