Preferred and Common Stocks
Businesses can issue two types of stock, common stock and preferred stock. Although both types of stock give holders partial ownership of the firm and the right to receive dividends, there are crucial differences between the two. Businesses that are issuing stocks and people who are buying them should be aware of the differences between both types of stocks and the advantages that each type offers.
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Common Stocks
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Common stock is, as the name implies, regular stock in a company without special privileges attached to it. Common stocks are issued by a firm and sold to shareholders. The shareholders then have equity in the firm which gives them the right to influence the firm and receive profits from the firm. Common stock holders have the right to influence the company through voting privileges and they receive profits through the dividends issued by the firm.
Preferred Stocks
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Preferred stocks are a special variety of shares in a company. Their main distinguishing feature is that they have specified dividends. In this sense, they are similar to bonds because they provide a guaranteed income to shareholders at a regular interval. Holders of preferred stock have may or may not have voting rights, depending on the decision of the issuing company.
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Differences
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The key difference between preferred and common stocks is that preferred stocks offer a guaranteed return. Additionally, preferred stocks have preference for receiving dividends. This means that a firm must pay its dividends to preferred stockholders before it can pay common stockholders. In the event of a firm liquidation, bondholders are paid first, followed by preferred stockholders and finally common stockholders.
Which is Better?
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Preferred stocks have several advantages: they offer guaranteed income, regular payments and preference over common stocks for the issuing of dividends. Theses factors would seem to make preferred stocks the best choice, however, common stocks tend to perform better over time. This means that a long-term investor is likely to make more profits with common stocks than preferred stocks. For someone looking to invest over the short-term, or who needs regular, guaranteed income, preferred stocks are the logical choice.
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