Preferred vs. Common Stock: What Are The Differences?
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Summary:
Some of the biggest differences between preferred vs. common stock are the stocks’ priority, dividends, and volatility. Preferred stock holds priority over common stock, often has fixed dividends, and tends to be less volatile. However, preferred shareholders do not get voting rights. Common stock, on the other hand, gives stockholders voting rights but doesn’t usually have fixed dividends and can be more volatile than preferred stock.
When it comes to investing in stocks, there are two main types of stocks that investors can choose from: preferred stock and common stock. While both types of stocks represent an ownership stake in a company, there are some key differences between the two that investors should be aware of.
In this article, we’ll take a closer look at the differences between preferred and common stock as well as what investors should consider when deciding which type of stock to invest in.
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Preferred stock
Preferred stock is a type of stock that typically has a higher claim on a company’s assets and earnings than common stock. This means that if a company were to go bankrupt and liquidate its assets, holders of preferred stock would be paid out before holders of common stock. Preferred stock also typically pays a fixed dividend, while the dividends of common stock can vary.
One of the main benefits of preferred stock is the stability of its dividends. Since the dividends are fixed, investors can count on a steady stream of income from their investments. Additionally, preferred stock is often less volatile than common stock, as the dividends provide a floor for the stock’s value.
IMPORTANT! Keep in mind that while preferred stock comes with multiple benefits, you don’t get voting rights by holding this type of stock. If you’re looking to invest in a company for a share of the voting rights, you may want to invest in common stock instead.
Common stock
Common stock is the most widely held type of stock and is typically what most people think of when they hear the word “stock.” This type of stock represents an ownership stake in a company and gives shareholders the right to vote on matters such as the election of the company’s board of directors.
Unlike preferred stock, common stock does not have a fixed dividend. Instead, the dividends paid to common shareholders are determined by the company’s board of directors and can vary from quarter to quarter or year to year. Additionally, common stock is often more volatile than preferred stock. The dividends of common stock can vary, which means the stock’s value can fluctuate more dramatically.
Preferred vs. common stock: Key differences
The main difference between preferred and common stock is the claim on assets and earnings. Preferred stockholders have priority over common stockholders in the event of a company’s liquidation. Additionally, preferred stock typically pays a fixed dividend, while the dividends of common stock can vary.
Another important difference is that preferred stock is often less volatile than common stock. This is because the dividends provide a floor for the stock’s value. Common stock, on the other hand, is often more volatile because the dividends can vary.
Finally, common stockholders have voting rights, while preferred shareholders do not. This means that common shareholders have a say in the election of the company’s board of directors and other important matters.
FAQs
Is preferred stock a good investment?
Preferred stock can be a good investment for those looking for a stable stream of income and less volatility. However, it’s important to do your own research and carefully consider the specific characteristics of the stock and the company before investing.
Are common stocks better than preferred stocks?
It depends on the specific characteristics of the stock and the company, as well as the investor’s goals and risk tolerance. Common stocks tend to offer more growth potential and voting rights, while preferred stocks offer a higher claim on assets and earnings and a stable stream of income.
Can a company change its preferred stock to common stock?
Yes, a company can change its preferred stock to common stock. However, this is a rare occurrence and usually requires approval by the preferred shareholders.
Key Takeaways
- Preferred stock offers a higher claim on a company’s assets and earnings than common stock.
- Preferred stock typically pays a fixed dividend, while the dividends of common stock can vary.
- Common stock offers voting rights, while preferred shareholders do not.
- Preferred stock is often less volatile than common stock, while common stock is often more volatile.
- Investors should carefully consider their goals and risk tolerance when deciding which type of stock to invest in.
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