Preferred vs. Common Stock: What Is the Difference?

Most companies have only one type of stock, common stock, but some companies have two types of stock, common stock and preferred stock. Common stock is the regular stock everyone knows, so let’s look at what makes preferred stock different. 

What are common stocks? 

Common stock is a form of ownership stock traded in the market. Unlike many other financial assets, the common stock has no expiration date. After it is acquired, the stock owner owns the company in the proportionate share that stock represents the company’s capital stock. The stock owner will hold it until it is sold, inherited, or the company ceases to operate. 

What are preferred stocks?  

Preference stocks are stocks established by the company with different characteristics depending on the company’s decision. This type of stock does not give the shareholder the right to vote or a share of the capital. Still, it does give the shareholder priority when receiving dividends or settlements, as we will see later. Before acquiring this type of asset, one must know the specific characteristics of preferred stock. 

What is the difference between preferred stock and common stock? 

Firstly, it is essential to know that each company that decides to issue preferred stock characteristics is established. So these characteristics may vary from one company to another. Here we will discuss the most common characteristics of preferred stock. But remember that there may be preferred stock with different characteristics than the ones we will discuss here. Before you buy any preferred stock, you should always know in detail the specific characteristics of the preferred stock you want to buy to avoid surprises. 

In general, preferred stock does not have voting rights. This means that they cannot vote at shareholder meetings. While you may think this is irrelevant to a small investor, who cannot influence the company’s decisions, this is not the case. And it’s not because in the event of a takeover bid or a fight for control of a company between two or more prominent investors. Those political rights matter a lot and can make stocks with political rights worth significantly more than those without. 

Preferred stock generally has priority for dividends over common stock. If all goes well, both types of stock will receive their dividends. But if things aren’t going so well, preferred stock may receive its dividends, and common stock may not, or at least have its dividends reduced. If a company goes bankrupt, preferred stock has a preference over common stock. But if you invest wisely in solid companies, you shouldn’t have such problems. 

Preferred stock usually is redeemable at the discretion of the company. This means the company can redeem them whenever it wants, at the price it sold them. The dividend on preferred stock can depend on the amount invested, the company’s performance, the dividend on the common stock, etc. Generally, a company with only one type of stock is better for all parties because the more clarity there is, the better for everyone. 

A company with both common and preferred stock makes the common stock more attractive because of the political rights, the fact that it’s not redeemable, etc. At the same time, we think it’s essential that each preferred stock has its own characteristics. For the average investor, studying the legal implications of a particular preferred stock can be pretty tedious. But there may be instances where preferred stock is preferable to common stock. 

Choosing Between Common and Preferred Stock 

Suppose you have to choose between a company with common and preferred stock. In that case, common stock is generally more attractive because of the political rights and non-redeemable. However, because a preferred stock has different characteristics, there may be cases where preferred stock is more attractive than common stock. However, you should always consider all the legal implications of acquiring them.