Common stocks and preferred stocks are both equity instruments issued by a joint stock company. Each type of stock gives a shareholder partial ownership in the company in proportion to their shareholding. However, common stock and preferred stock have significant differences, including risk, ownership, and profit.
What is common stock?
These are the most common types of stock issued by a company. Shareholders who buy common stocks are provided with a few rights in proportion to their equity, for example, voting rights.
What is preferred stock?
Preferred shareholders enjoy preferential rights over common shareholders but have no voting powers.
Difference between common stock and preferred stock
| Common stocks | Preferred stocks |
| When a company has an IPO, it sells common stocks to the public and raises money. | A company issues preferred stocks to specific investors. |
| Common stockholders can vote in the company’s decision-making process. Every single share represents 1 vote. For example, if you have 100 shares of a company that means you have 100 votes.
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Preferred stockholders are not given any right to vote. |
| For common stockholders, a company’s board of directors can decide whether to pay the dividends as well as how much to pay. | For preferred stockholders, a company has to pay a fixed dividend after a fixed time interval. For an interval when a company fails to pay dividends to preferred stockholders, it is liable to pay all its dues. |
| Common stockholders receive dividends after preferred stockholders. The dividend for common stocks is slightly lower than preferred stocks. | Preferred stockholders always get preference while paying dividends and enjoy higher dividends than common stockholders. |
| Common stocks are usually bought by the general public. Common stocks can be bought by retail investors or financial companies. It is available for everyone.
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Preferred stocks are generally bought by mutual funds companies, wealthy investors, financial institutes, etc. It is because a company issues such shares only when they need to arrange a huge amount of money in a short period.
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| Common stockholders receive better returns due to their high volatility. | Preferred stock typically has less potential for profit.
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| Common stocks are riskier than preferred stocks. | Preferred stocks are considered less volatile due to their fixed return. |
| In case of windup or bankruptcy of a company, common stockholders are paid after preferred stockholders. | During bankruptcy, preferred stockholders are paid first. |
Moreover, preferred stockholders cannot sell their stocks in the stock market like common stockholders. Instead, preferred stockholders can be sold through:
- Call feature: The issuer has the right to call in or redeem at a present price.
- Convertible feature: This gives investors an option to convert the shares into a fixed number of common shares after a predetermined date, which means they can sell stocks easily in the market.
Making stock market investments
When drawing investment plans and strategies to identify stocks to invest in, it is essential to view the conditions in the stock market today. Another way to go about it is to get in touch with a financial expert who can help devise investment plans that are in line with your risk appetite, financial goals and investment horizon.
