Let’s be honest: stock investing can be complex.
Aside from the confusing terminology, there are different forms of stocks that you can invest in — common stock and preferred stock.
What’s the difference between the two?
More importantly, how can you choose which is right for you as you start your stock investing journey?
In this article, we’ll break down common stock vs preferred stock so that you can make the best stock investing decision now and into the future.
What is Common Stock?
By definition, common stock is a security that represents ownership in a corporation. As the name suggests, common stock is the most common type of stock ownership.
That ownership can be broken down to a percentage. For example, let’s say a company has 100 shares. In this case, a single share would be equal to one percent ownership of the company.
Each common stockholder is entitled to a proportional share of a company’s profits. These profits are given out in the form of dividends.
In the case of common stock, these dividends vary. If the stock is doing well, stockholders can expect a high dividend. If the stock is performing poorly, stockholders can expect little in payout.
Common stock can be a part of a short or long-term stock investing strategy. Given common stock’s volatility, shareholders may experience high returns, but these high returns may not be stable for a long period of time.
Advantages of Common Stock
A big advantage, common stock gives you the ability to vote in major decisions relating to the company like mergers and the board of directors.
Disadvantages of Common Stock
On the other hand, the main disadvantage with common stock is that in the event of liquidation, common stockholders will be the last to get paid.
What is Preferred Stock?
Preferred stocks, or preferred securities, get their name because of the preferential treatment.
For example, if a company goes into bankruptcy, shareholders have a higher likelihood of being paid since they receive “preferential” treatment over common shareholders.
Unlike common stock, preferred stocks’ dividends are fixed. This is why in many investing stock investing strategies, preferred stocks are part of a long-term strategy.
Preferred stocks hold value, like a bond, and are less volatile compared to common stocks. So while preferred stocks may not pay as much as common stock, they will likely be more stable, providing a return if the investor holds them to their maturity.
Advantages of Preferred Stock
As mentioned before, the primary advantage of preferred stock is that in the event of liquidation, their fixed dividends are paid before common stockholders.
Disadvantages of Preferred Stock
On the other hand, the primary disadvantage is that preferred stocks provide no voting rights to their shareholders. So in the event that the company votes for a new board of directors, those who own preferred stock have no say.
The Bottom Line: Common Stock vs Preferred Stock
Should you invest in common stock or preferred stock?
It comes down to your stock investing strategy. Ideally, a diverse portfolio will provide a mix of benefits to the investor. That, along with increasing your education can reduce your risk and enhance your profit in the long-term.