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Preferred Stock vs Common Stock

When it comes to investing in publicly traded companies, individual investors have several options available to them. Two of the most common types of stock ownership are preferred stock and common stock. While both types of stocks represent ownership in a company, they differ significantly in terms of their characteristics, rights, and privileges.

What is Preferred Stock?

Preferred stock, also known as preference shares, is a type of stock that has a higher claim on assets and dividends than common stock. Preferred shareholders have priority over common shareholders when it comes to receiving dividends and the return of their investment in case the company liquidates. This makes preferred stock an attractive option for investors who are seeking a relatively stable income stream.

What is Common Stock?

Common stock, also known as ordinary shares, represents ownership in a company on a proportional basis. When you buy common stock, you become a part-owner of the company and are entitled to vote on important matters such as the election of directors and major business decisions. As an owner of common stock, your return on investment is directly tied to the company's financial performance.

Key Differences Between Preferred Stock and Common Stock

  • Claim on Assets: Preferred shareholders have a higher claim on assets in case the company liquidates than common shareholders.
  • Dividend Priority: Preferred shareholders receive dividends before common shareholders.
  • Voting Rights: Common shareholders typically have voting rights, while preferred shareholders do not.
  • Return on Investment: The return on investment for preferred stock is generally lower than that of common stock.

When to Choose Preferred Stock

Preferred stock can be a good choice for investors who:

  • Are seeking a relatively stable income stream
  • Want to minimize their risk exposure
  • Prefer a more predictable return on investment

When to Choose Common Stock

Common stock can be a good choice for investors who:

  • Are willing to take on more risk in pursuit of higher returns
  • Believe in the company's long-term growth prospects
  • Value voting rights and the ability to participate in major business decisions.