How to Distinguish Common Stock From Preferred Stock

A common stock (also called an ordinary share or voting share) is a basic stock that offers proportional equity in a business and voting rights on company issues. Common stocks are the most typical kind of stock that average investors can purchase. This volatile stock type can fluctuate significantly with the market—with the possibility of dropping to zero or skyrocketing to almost unlimited levels. The onus is on stockholders to decide when to sell their shares for a return on their investment. Different classes of common stock in a public company allot different voting rights based on the class of stock the common stockholders own.

The major advantage of purchasing common shares is that they’re known for having the most potential for long-term gains.

Alternately, common stocks are more subject to fluctuations and losses, and common stockholders are usually the last on the list for payouts when it comes to bankruptcy or liquidation, with priority going to bondholders, debtholders, and preferred stockholders.

Preferred stock is a type of medium-risk stock that offers investors proportional equity in a specific business without voting rights. Preferred stocks operate more like a hybrid of stocks and bonds, usually with fixed dividend payments and a predetermined redemption value. This unique stock is popular among risk-sensitive investors because it offers a slower, more stable investment without the chance of significant gains.

There are many different types of preferred stocks, including cumulative preferred stocks, participating preferred stocks, convertible preferred stocks, callable preferred stocks, and adjustable-rate preferred stocks.

The advantages of preferred shares are that shareholders have a more significant claim on company assets and will be paid out before common stockholders in the event of a liquidation of assets. They also offer investors a more stable fixed income (especially when interest rates are low).

The most common disadvantage of purchasing preferred stock is that they typically don’t have significant potential for large, long-term gains.

Common stock and preferred stock are two stock options that share a key similarity: they represent a public company’s partial ownership. When you purchase shares of common stock or preferred stock, you effectively own a small portion of the company’s assets, which you can trade or sell at a later date.

Common stock and preferred stock are two asset types with a few key differences:

• Growth potential. Common stocks are subject to volatility and can experience significant fluctuations as the market price rises, which means they have almost unlimited potential for higher dividends. However, preferred stocks usually come with a fixed-amount redemption value, meaning that stockholders won’t be able to sell their preferred stock for a significant figure even if the price spikes.
• Stability. Since common stocks can experience significant value fluctuations, they run a higher risk of dropping to zero. Preferred stock dividends are a much slower and more stable investment since they experience much less dramatic swings and usually pay out a fixed dividend.
• Voting rights. Common stockholders can vote on parts of a company’s operations, including its board of directors, internal policies, and significant financial decisions. Conversely, preferred stockholders usually do not have voting rights, and their opinions do not factor into decisions surrounding company operations.

Here are some key factors to consider when deciding whether to purchase common or preferred stock:

1. 1. Level of influence. If you want an asset that allows you to have a say in the company’s operations, common stocks are a good option since they usually come with voting rights. Preferred shareholders typically don’t receive voting rights and won’t be able to vote on company decisions.
2. 2. Investment time frame. If you’re looking for an investment that will pay off in the short term, preferred stocks can be a good option since they offer small, steady dividend income without the potential for much growth. If, on the other hand, you’re looking for an investment that could increase in value the longer you hold onto it, common stock dividend yields can be much more significant in the long term if share prices rise.
   
3. 3. Risk assessment. Common stocks are a much riskier investment since it’s much more typical for them to drop in value. If the company goes bankrupt, common stockholders are the last in line to receive payments. Preferred stocks have lower risks than common stocks since they don’t fluctuate as much with the market, and stockholders are a higher priority for bankruptcy payments.

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