Common and Preferred Stocks

Stock (also known as the share) is a term, used to represent owners’ interest and potential claim on assets and income of a company. In order to raise capital for fulfilling financing requirements of companies, common and preferred stocks are issued to the general public in a stock exchange; both stocks have different rights, benefits, and restrictions.

Common Stocks

Common stocks (also known as ordinary shares) represent ownership of shareholders in a company, the holder of common stocks receive the last claim (after preferred stock) on income and assets of the company. For example, if your company goes bankrupt then being a common shareholder, you will get last claim on company’s assets after creditors and preferred shareholders.

Preferred Stocks

Preferred stocks’ holder also retain ownership (like common stockholder) of the company but these stocks come with certain preferences like fixed dividend payments and priority in case of bankruptcy however due to reduced financial risk, preferred shareholders receive less return on investment, have no voting rights at a general meeting of the company and trade like a bond with no stock price appreciation.

Difference between Common and Preferred Stocks

Basis for Comparison

Common Stocks

Preferred Stocks

Types Have no types in terms of characteristics. There are commonly four types of preferred stocks: cumulative, non-cumulative, participating and convertible preferred stocks.
Arrears of dividend In case, dividend is skipped for a year then it will not be paid with nest year dividend. Cumulative preferred stocks receive skipped dividend of the last year with current year dividend.
Priority while payment While liquidation, residual payments are made after creditors and preferred stockholders. While dividend payments or in the case of bankruptcy preferred stockholders are prioritized after creditors (in the case of bankruptcy).
Returned on Investment Receive greater return on investment due to fewer privileges and increased financial risk. Receive lower return on investment due to lower risk.
Voting Rights Have voting rights. Do not have voting rights.
Redemption and Conversion Cannot redeem nor convertible Convertible preferred stocks can be converted to ordinary stocks on the will of holders and their redemption is also possible.

Conclusion

Considering long-term growth, common stocks should be preferred whereas risk averse investors consider preferred stocks because of fixed return with low yield.

 

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