Preferred vs Common Stock

Today we are talking about the difference between preferred and common stock. So whether you “prefer” being paid dividends before others or wanted some “common” voting rights, this article might help.  

As we learned in The Amazing World of the Stock Market, investing in stocks allows you to hold partial ownership of a company, meaning you can profit or lose depending on how the company does. We also learned that some companies pay dividends, which are payments of corporate earnings to shareholders. Common shares are probably what you typically think about when referencing stocks, but let’s dive into the difference between common and preferred stocks!

 The main thing to note is that common shares have voting rights, and preferred shares don’t. Owning common shares means you have a vote per share, giving you some say when the company makes major decisions like voting on policy or electing a board of directors. That sounds pretty great, so why bother with preferred shares?

Preferred shares are similar to a bond because investors are guaranteed a fixed dividend amount, while common shares offer either a variable dividend or no dividend. The value of preferred and common shares also differs. Common shares are probably what you typically think about when referencing stocks because their value depends on supply and demand. Preferred shares, on the other hand, are similar to bonds in that they have a par value that fluctuates with changes in interest rates. When interest rates rise, the value of preferred shares falls. 

Most importantly, if the company defaults on a dividend payment or the company is liquidated, preferred shareholders get paid before common shareholders, making preferred shares lower risk. It’s also important to note that common stock often comes with higher risk, which means a larger potential for growth as well as for loss. Depending on your priorities, one might be a better option than the other!