The Differences Between Common and Preferred Stock
When it comes to investing in the stock market, one of the first decisions you’ll need to make is whether to purchase common or preferred stock. Both options have advantages and disadvantages, and it’s important to understand the differences between the two before making an investment.
Common Stock
Common stock is the most basic type of stock that a company can offer. When you purchase common stock, you become a part owner of the company and have the right to vote on important company decisions, such as the election of board members or major changes to the company’s operations.
One of the main advantages of common stock is that it gives you the potential to earn higher returns. This is because common stockholders are entitled to dividends, which are a portion of the company’s profits that are distributed to shareholders. However, common stockholders are only entitled to dividends after any preferred stockholders have received their dividends.
Another advantage of common stock is that it is more liquid than preferred stock. This means that it is easier to buy and sell common stock, making it a more attractive option for investors who need to quickly buy or sell their shares.
However, common stock also comes with greater risks than preferred stock. This is because common stock is more volatile, meaning that its value can rise and fall more quickly and unpredictably. Additionally, if the company goes bankrupt or liquidates, common stockholders are the last in line to receive any money from the sale of the company’s assets.
Preferred Stock
Preferred stock, on the other hand, is a type of stock that offers more security and stability than common stock. When you purchase preferred stock, you are entitled to receive a fixed dividend payment, which is paid out before any dividends are paid to common stockholders.
Another advantage of preferred stock is that it typically comes with a higher dividend yield than common stock. This can make it a more attractive option for investors who are looking for a reliable stream of income.
However, there are also some disadvantages to preferred stock. For example, preferred stockholders do not have voting rights, which means that they cannot participate in important company decisions. Additionally, preferred stock is typically less liquid than common stock, making it more difficult to buy and sell.
Ultimately, the decision to invest in common or preferred stock depends on your individual investment goals and risk tolerance. If you’re looking for the potential for higher returns and don’t mind taking on greater risks, common stock may be the better option. But if you’re looking for a more stable source of income and want to minimize your risks, preferred stock may be the way to go.
Table difference between common and preferred stock
| Common Stock | Preferred Stock | |
|---|---|---|
| Ownership | Owners have voting rights and may receive dividends but their dividends are not fixed and can fluctuate. | Owners have no voting rights but typically receive fixed dividends that are paid before common shareholders. |
| Risk | Owners have higher risk as they are the last to receive payment in case of bankruptcy or liquidation. | Owners have lower risk as they receive payment before common shareholders in case of bankruptcy or liquidation. |
| Dividends | Common stocks have variable dividends that are not guaranteed and vary based on corporate profits. | Preferred stocks have fixed dividends that are paid out before common shareholders and are generally lower than common stock dividends. |
| Price | Common stocks have higher price volatility and fluctuate more frequently than preferred stocks. | Preferred stocks are less volatile and provide a more stable, predictable return. |