If you’ve just decided to start investing in the stock market, chances are you have dozens of questions. Today’s blog is going to give you some basic, but vital, information about the difference between Common Stocks and Preferred Stocks. Hey, you have to start somewhere, right? Enjoy.
Before we begin, one thing to keep in mind is that, whether you purchase a common stock or preferred stock, any stock that you buy makes you a shareholder or, in basic terms, partial owner of the company whose stock you purchased.
Common Stocks
Common stocks are sold by most companies and are “pure” stocks. If someone mentions something about stocks, generally they’re referring to common stocks. One of the biggest differences between common stocks and preferred stocks is that common stocks have a greater potential for returns and, because of that, they’re purchased more often by investors.
When you own common stock in a company you have an equity ownership in that company and you’re entitled, as a shareholder, to vote on management issues every year at the company’s shareholder meeting.
Depending on decisions made by the management at the company whose stocks you own, you may or may not receive dividends, which is basically a distribution of the company’s profits.
Although it’s commonly believed that preferred stocks are better than common stocks, that’s not always true. The reason to buy them will be based on a number of factors including your financial goals, the amount of risk you are willing to accept and any interest that you might have in making decisions about what the company does.
The fact is however that, since most investors are interested in one thing, appreciation of their money, common stocks are more popular because they get better returns.
Preferred Stocks
Preferred stocks, in general, don’t have the price fluctuations that common stocks do and, for investors who are uneasy about risk, that’s good news.
Usually preferred stocks are sold by companies that offer a combination of aggressive investments (stocks) along with more conservative investments (bonds).
Unlike common stocks, where it’s possible to receive dividends (or not), with most preferred stocks the shareholder will be paid a dividend. In fact, if a company pays dividends to both preferred stock shareholders and common stock shareholders, the ones who hold preferred stocks will get paid first.
Should a company go bankrupt, preferred stockholders will have the first claim to any assets that the company owns.
Finally, there are no voting rights that come with preferred stocks. This is an important too many investors but, to those who are passionate about making decisions at the company whose stock they own, this right to vote is very important. If that’s you, preferred stocks are probably not your “cup of tea”.
And there you have it, dear readers, the difference between Common and Preferred Stocks. There are some subtle and not-so-subtle differences here but, as you educate yourself further about investing, it’s those subtle differences that sometimes are the most important.