Preferred Stock Vs. Common Stock. Their Differences and How to Invest

Do you know the difference between preferred stock vs common stock? If not don't worry as today you will get an in-depth review about these two types of stock.

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Preferred stock is a type of equity that has more voting power than the other types. Preferred stocks are usually issued by companies to raise money for expansion or acquisition purposes, and they have an agreed-upon dividend rate before any profits from operations can be distributed back to shareholders as cash dividends. The company's board of directors may also decide how many times per year it will pay dividends on its preferred shares. If you own preferred stock in your portfolio, then you'll want to make sure that you're getting paid regularly so that you don't miss out on potential gains when the share price rises.


Common Stock: This form of equity represents ownership in a business. It gives investors access to all future earnings generated by the company and allows them to sell their holdings at any time without penalty. Companies issue common stock through initial public offerings or secondary market transactions such as mergers and acquisitions. You should consider investing in common stock if you expect the value of your investment to increase over time because this kind of equity offers greater liquidity compared with preferred stock.

What are the differences between preferred stock vs common stock

The main difference between these two forms of equity is who gets what after the company makes some profit. Preference stockholders get first dibs on those profits while common stock holders only receive dividends once the company pays off its debt obligations. Another key distinction is that preference stock typically carries no voting rights; however, common stock does give owners the right to vote on certain matters affecting the company.


How do I invest?

You can buy both kinds of equity directly from the issuing company or indirectly via financial intermediaries called brokers. When buying direct, you need to know whether the company issues preferred or common stock. Once you've determined which class of equity you'd like to purchase, you must choose either a broker or an online brokerage account. Brokers offer services including research reports, trading advice, margin accounts, etc., whereas online brokers provide similar features but allow customers to trade securities using electronic platforms instead of paper contracts. Online brokers often charge lower fees than traditional brokers.


If you plan to hold onto your investments for several years, you might prefer to use an online broker rather than a full service broker. Full service brokers generally require higher minimum deposit amounts and monthly maintenance charges. However, most online brokers waive these requirements. In addition, online brokers tend to offer better customer support than full service brokers.  Once you've decided where to place your order, you'll need to determine how much capital you wish to commit to each security.

For example, if you were planning to put $10,000 into one particular security, you would enter "10" under the amount box next to the name of that security. Next, select the desired number of units for that security. Finally, click on the Buy button to complete your transaction.  When it comes to choosing among different types of stocks, there's really not much choice when it comes to individual companies.

The best way to find out about new businesses is to read newspapers, magazines, and other publications focused on small-business news. If you're looking for more information about specific industries, check out websites maintained by industry associations or government agencies.  For instance, the U.S. Small Business Administration provides useful resources for entrepreneurs interested in starting up their own businesses. Similarly, the National Association of Manufacturers, the American Bankers Association, and the Federal Reserve Board have helpful sites dedicated to helping people start and run successful businesses.

Benefits of preferred stock

Preferred shares are usually issued at par value with no stated dividend rate. This means they pay interest equal to the current market price of the underlying asset. The advantage of this arrangement is that investors don't lose money if the business fails because all outstanding shares will be converted into cash upon liquidation. Preferred shareholders also enjoy priority over unsecured creditors during bankruptcy proceedings.

However, preferred shares carry disadvantages as well. For starters, they typically come with restrictive covenants that limit management's ability to make certain decisions without shareholder approval. Also, many preferred shares lack voting rights so that holders cannot elect directors who may otherwise represent their interests.

Common Stock

Common stock represents ownership in a corporation. It pays dividends based on earnings after taxes and has voting power. A typical share of common stock carries a fixed dollar value per unit. Dividends paid on common stock are taxable income.  In general, common stock tends to provide greater liquidity than preferred stock. That's because its value fluctuates less frequently due to changes in the company's financial performance. On the downside, common stock can be riskier than preferred stock because it doesn't always receive preferential treatment from corporate managers. As such, some investors choose to invest only in securities that guarantee them a return regardless of whether the company succeeds or falters.


Frequently asked questions

What do I need to know before investing?

Before deciding which type of investment vehicle to use, consider what kind of returns you want to earn. Are you seeking long-term growth potential or short-term capital appreciation? Do you plan to hold onto an investment for years or months? What level of volatility do you prefer? These factors should help determine how much time you'll devote to researching investments.

How does my portfolio perform?

Once you've decided on your strategy, you must decide where to put your money. You could allocate funds across different types of assets or even within one category. However, most experts recommend diversifying among several categories. In fact, studies show that holding just 10 percent of your wealth in any single sector—whether stocks, bonds, commodities, or real estate—can reduce overall portfolio losses significantly when markets decline.

Is preferred stock better than common stock

If you're planning to sell your shares later, then choosing between preferred stock vs common stock depends largely on tax considerations. Preferring preferred stock allows you to avoid paying ordinary income taxes on dividends received while retaining control over the amount of those payments. Common stockholders generally owe federal income taxes on dividends earned.

When considering these two options, keep in mind that both types of equity offer similar levels of liquidity and stability. Both allow you to participate in future profits through regular distributions of dividends. The main difference is that preferred shareholders have priority claims against the company if there isn't enough cash available to pay all outstanding debts. Preferred stock also offers more protection against bankruptcy than common stock. If the company goes bankrupt, preferred shareholders get first crack at recovering their principal plus interest owed. This means that preferred shareholders will likely recover more of their original investment than common stockholders would.

Who should Invest In both Preferred Stock Vs Common Stock?

Both preferred stock vs common stock represent ownership interests in companies. Investors who seek exposure to both kinds of equities may find themselves exposed to higher risks than they'd like. For example, if a company experiences poor results, it might not be able to make dividend payments as promised. When this happens, holders of common stock lose out on their expected payout. Meanwhile, holders of preferred stock don't benefit from any increase in the company's net worth. They still end up with nothing but debt.

What are some other things I need to know about investing in stocks?

There are many ways to invest in stocks. Some people choose mutual fund managers; others buy individual securities directly. Still others purchase exchange traded funds that track specific indexes such as the S&P 500 index. Each approach has its advantages and disadvantages. Mutual funds tend to provide broad market coverage and can often generate high annual fees.

Bottom Line

Investing in stocks requires patience and discipline. It takes time for an investor to build a position in the right asset class. Once established, however, investors reap long-term rewards by participating in the growth of the economy. Therefore, this is all you need to know about preferred stock vs. common stock.