Difference Between Common Stock and Preferred Stock?

Both common stocks and preferred stocks have the tendency of creating good wealth for investors. Their individual preferences work well for different types of investors, however, ‘common stocks’ are more “preferred” by many investors because of its unlimited growth potential. They both grant investors part ownership in a company but offer investors different ways to make money off the investments. When it comes to common and preferred stocks, there are quite a few differences. However, the major difference is that common stocks give shareholders voting rights whereas, preferred stocks do not.

Common stock

This is a type of stock that gives investors “partial” ownership of a company. It is the most regular kind of stock that can be purchased on stock exchanges which many companies offer their public investors. Many times, when you hear people talk about stocks, they are actually referring to common stock. It represents a claim on dividends and gives the investors voting rights to elect board members who would oversee the affairs of the company’s management. Each investor is entitled to one vote per share owned, thereby, giving them the leverage to participate in the management affairs of the company.

Asides giving stakeholders the leverage to vote in a company, common stock has more potential to outperform bonds and preferred shares because of its large investor base. It also has great potentials for generating long-term gains for the investors. The performance of a company would certainly affect the common stock performance as well. If the company performs well, the stocks would also perform well and vice versa. On the flip side, common shareholders have more potentials to lose their money if a company fails. In an event of company failure, creditors must first receive their money in whatever percentage that is available before the shareholders of the company. Preferred shareholders will receive their percentage before common shareholders. Whatever is left goes to the common shareholders.

Preferred Stock

The most glaring difference between preferred and common stock is that it has no voting rights. Basically, preferred shareholders have no leverage to elect the board of directors or participate in any corporate voting in a company. Preferred shareholders may have little or no say in a company but they have a guarantee of fixed dividends in perpetuity. Preferred stock is similar to bonds as it has a fixed dollar amount that a company would pay preferred shareholders to redeem the shares. Many preferred stocks pay the shareholders dividends at a higher price than what common shareholders tend to receive. These dividends are paid year-in-year-out rather than quarterly payouts like common stock. Also, a company is obligated to pay preferred shareholders dividends before common shareholders. In addition, if a company crashes and has its assets distributed amongst its investors, preferred shareholders must receive a certain amount of money before common shareholders can get back their investments. However, preferred stock has a lower potential for unlimited growth. In fact, in most cases, preferred stock hardly experiences any large increase even if the company is performing well.