What is the difference between Common stocks & Preferred stocks?
When people talk about stocks, they typically come in two primary classes: common stock and preferred stock.
Businesses that want to raise money by selling stock can choose between two types: common stock and preferred stock. Both forms of stock may be profitable investments, and both can be found on major markets.
What are Common Stocks?
Common stock is the main class of stock. When people talk about stock, it generally mean common stock. when you buy common stock, you become an owner (partial) of the company and you usually have voting rights such as electing the board of directors or selling the company or demerging and other various issues of business.
Common stockholders are in the highest risk position meaning if the company goes bankrupt common shareholders are the last to get any money back.
As a common shareholder you'll get something called a pre-emptive right. Let's say there is a 1000 shares outstanding and you own 20 shares out of those 1000 shares and if the company issues another 1000 shares and you don't get a chance to buy any of these new issued shares, then you own a lower percentage now of the company. In this scenario you get a right called pre-emptive right to buy some of these new 1000 shares so that you can hold same proportion ownership.
What are Preferred Stocks?
When you buy preferred stock, you are called a preferred shareholder. A preferred shareholder gets a predetermined, fixed amount of dividend that's paid on a regular schedule. Many investors like this fixed dividend, but the board of directors can vote to not give you a dividend.
As a preferred shareholder, you have moderate risk which means if the company goes bankrupt, preferred stockholders will get money back before the common stockholders.
A company can also issue convertible preferred stocks. Convertible preferred stocks allow shareholders to convert their preferred shares into normal common stock under specific conditions. If you know the charaterstics of common stock and bond then you can relate that preferred stocks has some qualities of a common stock and some of a bond.
When interest rate climb, you should consider selling preferred stock as higher interest rates make preferred stocks lose its value.
The Difference- Common vs Preferred Stocks
| Common stocks | Preferred stocks |
|---|---|
| Common stockholders have voting rights | Preferred stockholders don't have voting rights |
| may or may not receive dividend and receive lower dividend than preferred stocks | always receive dividends at a fixed rate and receive higher dividend than common stocks |
| less priorites than preferred stockholders | more priorites than common stockholders |
| Return potential is higher than preferred stocks | Return potential is lower than common stocks |
| Risk potential is higher than preferred stocks | Risk potential is lower than common stocks |
| Don't receive arrears (no concept) | receive arrears in the next year |
| High liquidity | less liquidity |
| Suitable for Long-term growth investors | Suitable for high-yield dividend investors |
