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Preferred Stock vs. Common Stock: What Is The Difference?

It is usual for businesses to generate more money by selling stocks to the public may offer one of the two different kinds – the preferred stock or the common stock. Both are considered worthy investments since they can allow you to become partial owners of the business.

But despite several similarities, there are also some significant differences between the two. If you are confused about the distinction between preferred stock vs common stock, you need to learn what they are exactly so you can decide which one to get to expand your investment portfolio.

Preferred Stock

Between the two options, the preferred stock is typically known as the less volatile one. The dividends of preferred stock are often higher than the common stock and are fixed when they reached a specific rate. It also comes with a set redemption price that the company must have to spend to redeem it.

One reason why several people choose preferred stocks includes getting compensation before the common stockholders can receive their dividends. It also comes with a higher dividend yield compared to common stocks or bonds. Most importantly, investors choose this because preferred shares usually have a greater repayment claim if the business goes bankrupt.

Common Stock

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Like the name suggests, common stock is considered the most prevalent kind of stock issued by businesses. It allows shareholders to pitch in the profits with the help of capital appreciation or dividends.

The common stock owners are given “preemptive rights” to manage the same proportion of the company’s ownership over time. If the company decides to offer more stocks in the future, the shareholders can acquire as much stock as they can to maintain their ownership comparable.

Voting Rights

Even if both the preferred stock and the common stock investors own a percentage of the company, only those who have common stock are given voting rights when making company decisions. It means the common stockholders have a say about how the company will run, including electing a new board of directors. On the other hand, the preferred stockholders have no voting rights in the company.

There are several significant differences between preferred stocks and common stocks that you need to know before investing.

Dividend Payment

Both the preferred stock and common stockholders can get dividends. However, the payment of dividends varies between the two. The common stockholders get variable dividends and are usually paid out depending on the profitability of the company.

Meanwhile, preferred stockholders will get fixed dividends all the time. The dividends they get are also cumulative, meaning they will still get the payment if they cannot get one during a certain period.

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Conversion

You may convert your preferred stock to a certain number of common shares. However, you cannot convert common stocks to preferred stocks.

Despite the differences, both preferred shares and common shared can be valuable investments. You only need to think about which one fits your desired investment goals. It would be best to assess your objectives, time frame, and financial situation to determine which one is right for you before deciding which investment stock to get.

Written By

Riley is a finance, lifestyle, and entertainment writer living in San Diego. He received his bachelor's degree in Journalism and Multimedia from the University of Oregon. His work has been featured in many finance and lifestyle publications throughout the US. When he is not writing, Riley enjoys reading and hanging out at the beach with his dog.

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