Common Stock Vs. Preferred Stock

Common stocks and preferred stocks are similar in several ways. They both represent ownership in a corporation and receive dividends. However, there are some main differences between the two types of stock.

Claim to Earnings

A preferred stockholder has the right to receive dividends before common stockholders in case of bankruptcy or liquidation. This makes preferred stock less risky than common stock, though bondholders will be paid ahead of both the preferred and common stockholders.

Dividends

Dividends are paid to preferred stockholders first and on a schedule set at the time of the transaction. They tend to be greater than common stock dividends. The company is responsible for deciding when and how much of a dividend to give to common stockholders. It is not a scheduled occurrence.

Fluctuations

Because of the set dividends, there is little fluctuation in the price of preferred stock. It can be described as a fixed-income security.

Voting Rights

Owners of common stock have ownership rights in the corporation. They decide the board of electors and help form company policy. Preferred stock owners have no voting rights.

Considerations

Whether investing in common stock or preferred stock, do some homework. Both have an inherent risk, although common stock tends to outperform preferred shares in the long term.

References

• What Is the Difference Between Preferred Stock and Common Stock?
• What Does Preferred Stock Mean?