Common Stocks and Preferred Stocks

Many people have trouble choosing common stocks and preferred stocks. The reason being, there are so many exchange solutions. Blue chip stocks, growth stocks and penny stocks are popular choices. Of course, with both, there are risks.

What is Common stock?

Having ownership in a corporation, gives you a security known as a common stock. However, in the event of liquidation, a common stockholder is actually at the bottom of the ladder when it comes to receiving funds or assets. 

Debtholders would be the first to receive something, followed by preferred shareholders, bondholders and common shareholders. So when you thought debt shares or preferred shares were risky, its time to think again. 

On the other hand, common shared do tend to outperform them on a longer term scale. Common stock also carries voting rights.

What is Preferred Stock?

Having ownership in a corporation, gives you a security known as a preferred stock. Although, it does have a claim on its earnings and assets, and this claim is a lot higher than common stock. These shares do not carry voting rights and are paid before dividends to common shareholder.

Common Stock vs Preferred Stock

When dividends are concerned, preferred shareholders are in a better position. With common stocks, there is a higher growth potential, with preferred stocks slightly lower. Common stocks have differential rights whilst preferred stocks have preferential rights. 

Common stock has no guaranteed return whilst preferred stocks have a guaranteed return, and that, at a fixed rate. Participating in voting in the companies meeting, comes with owning common stock. However, with preferred stock, you are not able to participate. 

Whilst payments to common stock holders are made at the end, preferred stock holders will receive their funds before. A common stock holder is also not entitled to arrears of dividend if it had been skipped the previous year, whilst a preferred stock holder is.

This may have helped your decision, but there are still a few factors to consider. Are you looking for a long or short term investment? Would it be a high risk or lower risk investment? In regards to growth, its better to go for common stock. But with risk, preferred stock wins with a lower percentage.