Common vs. Preferred Stock – What’s the Difference

But seriously, some investors do think that now is the right time to buy certain stocks. However, there’s more to playing the stock market than knowing which company stocks to purchase and when to sell. Inexperienced investors should take the time to learn the ins and outs of the equity market before beginning.

One thing to consider is whether to purchase common or preferred stock. They are the two classes of stocks that are sold by companies. Each is subject to different financial terms.
Common stocks are securities representing equity ownership in a corporation. Owning them usually gives investors voting rights (voting shares) in influencing the corporation’s objectives and policies, determining stock splits and electing the company’s board of directors. One share of common stock is usually equal to one vote.

Common stock shareholders are entitled to a share of the company’s gains through dividends and capital appreciation. Capital appreciation occurs when a common stock’s value increases and investors make a profit when they sell the stock at its higher market value. Dividends are paid from a company’s retained or current earnings typically on a quarterly basis. This payment is not guaranteed, but rather is linked to the market like the price of common stock.

But if the company tanks and is liquidated, common stock investors can claim rights to its assets only after bondholders, other debt holders and preferred stockholders have been paid. Preferred, like common stocks, represent partial ownership in a company. But preferred stock shareholders do not have any of the voting rights in the business available to common stockholders. Companies that want to separate their investors’ economic interests from the actual governance of the business usually favor preferred stock.

Preferred stocks pay fixed dividends that do not fluctuate with the performance of the company. The downside is that the company is not obligated to pay these dividends if it doesn’t have sufficient financial resources. The main advantage of owning preferred stock over common stock is that investors have a greater claim on the company’s assets in the event the company is liquidated.

Posted on December 21, 2009
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