Preferred Stock vs. Common Stock: A Guide

As an investor, you may have heard of preferred stock and common stock, but do you know the difference between the two? In this guide, we'll compare preferred stock and common stock so you can make informed decisions about which type of stock is right for your investments.

What is Preferred Stock?

Preferred stock is a type of stock that has priority over common stock when it comes to dividends and asset distribution. Preferred stockholders are also typically first in line when it comes to receiving dividends, meaning that they get paid before common stockholders. Additionally, preferred stockholders are generally not entitled to voting rights, which means they don't get a say in the direction of the company. In the event of a bankruptcy, preferred stockholders are usually paid out ahead of common stockholders, although not always. However, preferred stockholders are usually not entitled to any additional payments if the company is sold or liquidated. Preferred stock usually has a fixed dividend rate, meaning that the amount of dividends paid out is usually predetermined and can be easily calculated. This makes it easier for investors to predict their returns from preferred stock investments and allows investors to plan accordingly. Additionally, preferred stock often has a lower volatility than common stock, which makes it a safer investment option for those who are risk-averse.

What is Common Stock?

Common stock is the most widely held and traded type of stock. Common stockholders are the owners of the company and are entitled to voting rights, meaning they get a say in the direction of the company. Additionally, common stockholders are usually last in line when it comes to receiving dividends, meaning they get paid after the preferred stockholders. Common stock is usually more volatile than preferred stock, which means investors can make more money from their investments if the stock price goes up. However, they also risk losing more money if the stock price goes down. Additionally, common stock does not usually have a fixed dividend rate, so investors can't predict their returns as easily as with preferred stock.

Preferred Stock vs. Common Stock: The Pros & Cons

When comparing preferred stock and common stock, there are a few key differences to consider. On one hand, preferred stock offers a more predictable return and lower volatility than common stock. On the other hand, common stock offers more potential for high returns but also carries greater risks.

Preferred Stock Pros

• Lower volatility than common stock. • Fixed dividend rate makes it easier to predict returns and plan accordingly. • Priority over common stock when it comes to dividends and asset distribution.

Preferred Stock Cons

• No voting rights. • Not entitled to any additional payments if the company is sold or liquidated.

Common Stock Pros

• Owners of the company with voting rights. • More potential for high returns if the stock price goes up.

Common Stock Cons

• Last in line when it comes to receiving dividends. • Higher volatility than preferred stock. • No fixed dividend rate, making it harder to predict returns.

Which Type of Stock is Right for You?

Ultimately, the decision of which type of stock is right for you will depend on your investment goals and risk tolerance. If you're looking for a more predictable return and lower volatility, then preferred stock may be the right choice for you. On the other hand, if you're looking for more potential for high returns, then common stock may be the better option.

Conclusion

Preferred stock and common stock both have their advantages and disadvantages, and it's important to understand the differences before making any investment decisions. Preferred stock offers a more predictable return and lower volatility, while common stock offers more potential for high returns but also carries greater risks. Ultimately, the decision of which type of stock is right for you will depend on your investment goals and risk tolerance.