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Common and Preferred Stocks – How Common Stocks Are Different From Preferred Stocks?

Last Updated Date - Mar 23, 2023

In this article, we will be discussing both common and preferred stocks. Their definition, their attributes, we will compare the two in detail.

This can help the investors understand which stock is better for their portfolio. Then they can take wise decisions as well.

You will often hear stock enthusiasts and investors talk about stocks/shares. However, have you ever thought about which kind of sharing they talk about? Whether it is common stocks or preferred stocks?

Yes, though the name is preferred stocks it is not much talk about amongst the investors. However, both common and preferred stocks have their own sets of advantages for investors. Even the difference between the two is very thin.

What is Common Stock?

Common Stocks are the equity shares of a company. The name is quite appropriate because, by stocks, most people mean common stocks only.

When someone buys common stocks, they get equivalent ownership in the company. The investor gets voting rights as well.

The ownership increases as they invests in more common stocks of the company. Most of the investors who invest in common stocks, want to sell the stocks at a higher price when the price increases.

The company pays a dividend on common stocks as well but that depends on the profit left after paying dividends to the holders of the preferred stock.

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    Features of Common Stocks

    • Ownership of the Company: The common stockholders get ownership proportionate to their stock holding in the company. The ownership increases as they buys more stocks of the company and holds them.
    • Right to vote: The common stockholders are the real owner of the company. They have voting rights in the company. They have the right to vote for new board members. Even they have the opportunity to become board members if they hold a certain percentage of shares of the company.
    • Dividends: Common Stockholders receive dividends but it is subjected to the profit of the company. It also depends on the company’s decision to pay a dividend for that quarter/year or not. The company may choose not to pay a dividend if the profits are less or losses have been incurred in that quarter or the year. So, there is no mandatory rule for the companies to pay a dividend to the common stockholders.
    • Claims on Earning: When it comes to claims on the earnings, common stockholders have the last right to claim.
    • Returns: The main return on investment for the common stockholders is the increase in the price of the shares. Dividends are like the cherry on the top, but the main return is the share price rise.
    • Conversion: Common stocks cannot be converted into preferred stocks. There is no possibility of conversion for common stocks.

    What are Preferred Stocks?

    Preferred stocks, as the name suggest, is getting some preference over common stocks. Well, Preferred stocks are like a combination of common stocks and bonds.

    Preferred stockholders have ownership in the company like the common stockholders. The preference is given when it comes to dividends.

    The preferred stockholders get a fixed dividend irrespective of the profit and loss of the company. The company has to pay the dividend to the preferred stockholders before they pay it to the common stockholders.

    Features of Preferred Stocks

    • Ownership of the Company: The preferred stockholders are also the owners of the company.
    • Right to vote: Though the preferred stockholders are owners of the company, they do not have any voting rights in the company. They cannot vote for any board member or get elected as well.
    • Dividends: Preferred stockholders are preferred when it comes to the dividend. They have to be paid out a fixed-rate/amount of dividend irrespective of everything. In case there is a loss in one quarter, and the company is not able to pay the dividend to the preferred stockholder, then it has to be adjusted in the next quarter.
    • Claims on Earning: Preferred stockholders have the right to claim earnings of the company right after the bondholders. Their claim has to be put over the claim of the common stockholders.
    • Returns: In the case of preferred stocks, the return mainly comes in the form of mandatory dividends. As these stocks are not traded on the exchange, so, there is no rise in the price of these stocks. So, there is no capital gain as well.
    • Conversion: You can convert your preferred stocks into a certain number of common stocks.

    Comparison of Common and Preferred Stocks

    Features Common Stock Preferred Stock
    Ownership in the company Yes Yes
    Right to Vote Yes No
    Dividends Not Mandatory and Variable Mandatory and Fixed
    Earning Last Claim Second Claim (after Bonds)
    Conversion Not Possible Possible
    Returns Price Rise Fixed Dividends

    Which stock to buy?

    If you are wondering which stock you should buy then you must go by the features of these two stocks.

    If you want to invest for the long-term and want your investment to grow and accumulate wealth for the future, then the common stock can be the right choice.

    Contrarily, if you are looking for regular income from your investment, then preferred stocks are appropriate.

    Similarly, if you are a risk-taker, then common stocks can be your perfect match otherwise, opting for preferred stocks is wise.

    So, it depends on the type of return you want out of your investment.

    Common and Preferred Stocks – Conclusion

    Finally, we can conclude by saying that both these stocks are an integral part of a company’s financial structure.

    While the common stocks are really common with the people, preferred stockholders get fixed dividends.

    The common stockholders have the right to vote but the preferred stockholder has the first claim on earnings before common stocks. If you are about to choose between these two, make sure to base the decision on your investment goals.

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