Common Stock vs. Preferred Stock
Common stock and
preferred stock are the two main types
of stocks that are sold by companies and
traded among investors on the open
market. Each type gives stockholders a
partial ownership in the company
represented by the stock.
Despite some
similarities, common stock and preferred
stock have some significant differences,
including the risk involved with
ownership. It’s important to understand
the strengths and weaknesses of both
types of stocks before purchasing them.
Common Stock
Common stock is the most
common type of stock that is issued by
companies. It entitles shareholders to
share in the company’s profits through
dividends and/or capital appreciation.
Common stockholders are usually given
voting rights, with the number of votes
directly related to the number of shares
owned. Of course, the company’s board of
directors can decide whether or not to
pay dividends, as well as how much is
paid.
Owners of common stock
have “preemptive rights” to maintain the
same proportion of ownership in the
company over time. If the company
circulates another offering of stock,
shareholders can purchase as much stock
as it takes to keep their ownership
comparable.
Common stock has the
potential for profits through capital
gains. The return and principal value of
stocks fluctuate with changes in market
conditions. Shares, when sold, may be
worth more or less than their original
cost. Shareholders are not assured of
receiving dividend payments. Investors
should consider their tolerance for
investment risk before investing in
common stock.
Preferred Stock
Preferred stock is
generally considered less volatile than
common stock but typically has less
potential for profit. Preferred
stockholders generally do not have
voting rights, as common stockholders
do, but they have a greater claim to the
company’s assets. Preferred stock may
also be “callable,” which means that the
company can purchase shares back from
the shareholders at any time for any
reason, although usually at a favorable
price.
Preferred stock
shareholders receive their dividends
before common stockholders receive
theirs, and these payments tend to be
higher. Shareholders of preferred stock
receive fixed, regular dividend payments
for a specified period of time, unlike
the variable dividend payments sometimes
offered to common stockholders. Of
course, it’s important to remember that
fixed dividends depend on the company’s
ability to pay as promised. In the event
that a company declares bankruptcy,
preferred stockholders are paid before
common stockholders. Unlike preferred
stock, though, common stock has the
potential to return higher yields over
time through capital growth. Remember
that investments seeking to achieve
higher rates of return also involve a
higher degree of risk.
* * *
Both common stock and
preferred stock have their advantages.
When considering which type may be
suitable for you, it is important to
assess your financial situation, time
frame, and investment goals.