Discover the Key Differences: Preferred vs Common Stock

Investing in the stock market can be a lucrative venture, but it requires a deep understanding of the different types of stocks available. Two of the most common types are preferred and common stock. Understanding the differences between preferred vs common stock can help you make informed investment decisions. This article will delve into the key differences between these two types of stocks, providing you with the knowledge you need to make the right investment choices.

What is Common Stock?

Common stock is the most prevalent type of stock that companies issue. When you buy common stock, you’re essentially buying a small piece of the company. This gives you the right to vote at shareholders’ meetings and to receive dividends, which are a portion of the company’s profits distributed to shareholders.

What is Preferred Stock?

Preferred stock, on the other hand, is a type of stock that gives its holders certain privileges that common stockholders do not have. Preferred stockholders have a higher claim on the company’s earnings and assets. This means that if the company goes bankrupt, preferred stockholders will be paid out before common stockholders. Additionally, preferred stockholders typically receive dividends before common stockholders and the dividend rate is usually fixed.

Preferred vs Common Stock: Key Differences

Now that we’ve defined what preferred and common stock are, let’s delve into the key differences between them:

• Voting Rights: Common stockholders usually have voting rights in the company, while preferred stockholders typically do not. This means that common stockholders have a say in the company’s decisions, while preferred stockholders do not.
• Dividends: Preferred stockholders usually receive dividends before common stockholders and at a fixed rate. Common stockholders’ dividends, on the other hand, can vary based on the company’s profits.
• Claim on Assets: In the event of bankruptcy, preferred stockholders have a higher claim on the company’s assets and earnings than common stockholders.

Which is Better: Preferred or Common Stock?

The answer to this question depends on your investment goals. If you’re looking for a steady income and less risk, preferred stock might be the better choice. However, if you’re willing to take on more risk for the potential of higher returns and you want to have a say in the company’s decisions, common stock could be the better option.

Case Study: Preferred vs Common Stock

Let’s take a look at a real-world example. In 2008, during the financial crisis, many banks were on the brink of bankruptcy. Common stockholders of these banks were at risk of losing their entire investment. However, preferred stockholders were in a better position. Even though they didn’t have voting rights, they had a higher claim on the banks’ assets and were more likely to recoup some of their investment.

Conclusion

Understanding the differences between preferred vs common stock is crucial for making informed investment decisions. While both types of stock can be beneficial, they each come with their own set of advantages and disadvantages. By understanding these differences, you can choose the type of stock that best aligns with your investment goals.

Remember, investing in the stock market always comes with risks. It’s important to do your research and consider seeking advice from a financial advisor before making any major investment decisions.