Differences between Preferred and Common Stock
All stock is not created equal. Companies offer two main types of stock: common and preferred stock, each with its share of advantages and disadvantages for investors. Preferred and common stocks are different in two key aspects.
First, preferred stockholders have a greater claim to a company's assets and earnings. This is true during the good times when the company has excess cash and decides to distribute money in the form of dividends to its investors. In these instances when distributions are made, preferred stockholders must be paid before common stockholders. However, this claim is most important during times of insolvency when common stockholders are last in line for the company's assets. This means that when the company must liquidate and pay all creditors and bondholders, common stockholders will not receive any money until after the preferred shareholders are paid out.
Second, the dividends of preferred stocks are different from and generally greater than those of common stock. When you buy a preferred stock, you will have an idea of when to expect a dividend because they are paid at regular intervals. This is not necessarily the case for common stock, as the company's board of directors will decide whether or not to pay out a dividend. Because of this characteristic, preferred stock typically doesn’t fluctuate as often as a company's common stock and can sometimes be classified as a fixed-income security. Adding to this fixed-income personality is the fact that the dividends are typically guaranteed, meaning that if the company does miss one, it will be required to pay it before any future dividends are paid on either stock.
Common stock and preferred stock both represent some degree of ownership of a company. Holding shares of common stock gives you the opportunity to vote in the election of the board of directors. This is usually equivalent to one vote per share that you own. Owning...
Please join StudyMode to read the full document