Common Stock vs Preferred Stock

A lot of people do not know that there is an upper class when it comes to stock.

There are two basic classes of stock offered by companies. Common stock and preferred stock. They are also known as common shares and preferred shares. Common stock is the stock that is offered to most investors. It’s the stock that you see traded each day on the various exchanges. Preferred stock is sold directly to investors by the company but is then later traded on the secondary exchange like common stock.

Preferred Stock VS. Common Stock

So let’s take a look at the features and benefits of the two types of stock.

Ownership: Common Stock

As part owners, common stockholders benefit from the stock price increasing in value. Stockholders with preferred shares will not see the same profit potential that common shareholders will have.

Priority of Payment: Preferred Stock

The stockholders of preferred stock have a higher claim on the earnings than the holders of common stock. If the company declares bankruptcy the preferred stock holders will be paid before common stock holders.

Dividend Payments: Preferred Stock

The dividends paid on a preferred stock are guaranteed and paid at regular periods. These stock holders will get a dividend from the company before other stockholders.

Voting Rights: Common Stock

Preferred stockholders will not have the right to vote in the business. Common stockholders have the right to vote on the leadership team and usually one stock equals one vote.

Price Fluctuations: Preferred Stock

The characteristics of a preferred stock are somewhat similar to a bond. The price of preferred stock will fluctuate with interest rate levels. Preferred stock is considered less risky because the price will not fluctuate as much as the price of common stock.

Convertibility: Preferred Stock

There is even a type of preferred stock that can be changed into common stock. Convertible Preferred Stock allows the investor to change their preferred stock into common stock. Common stock cannot move up to the upper crust of preferred stock though, sorry.

And the winner is…..

PREFERRED STOCK!