What Are Common Stock and Preferred Stock?
Common stock is the normal or standard form of stock issued by a publicly-traded company. Preferred stock offers several advantages, such as a guaranteed or semi-guaranteed dividend payment and priority in the event of a company liquidation, but has the drawback of not carrying voting rights, and possibly having a lower dividend rate than common stock.
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Dividends
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A company may choose to issue dividends to holders of common stock. Generally these payments will reflect the company's earnings. However, there is no requirement for a company to issue dividends to common stockholders, and there are no rules about how much a dividend should be.
A company issuing preferred stock will agree to make dividend payments at a fixed rate, regardless of whether or not it issues a dividend to common stockholders. A company may be able to postpone or cancel dividend payments to preferred stockholders if it has poor financial results. However, it cannot pay any dividends to common stockholders unless and until it has paid all preferred stockholder dividends in full.
Voting Rights
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A holder of common stock has the right to vote at a company meetings on major decisions, such as selecting a board of directors. Usually the holder gets one vote for each share. Holders of preferred stocks do not have voting rights.
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Liquidation
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In the event of the company going into liquidation, holders of preferred stock have a higher priority claim on assets than holders of common stock. Holders of preferred stock must get back their money (usually the stock's face value) in full before any holders of ordinary stock receive payment. However, both secured and unsecured lenders to the company have higher priority claims than any stockholders.
Variations
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Preferred stock can either be cumulative or non-cumulative. Cumulative means that if the company is unable to pay dividends, it must make up the difference the next time it does pay. Non-cumulative means that if the company is unable to pay dividends, the money is never paid.
Convertible preferred stock gives the holder the right to convert the preferred stock to common stock at a fixed rate. This may be attractive if, for example, the company starts paying high dividends to holders of common stock.
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