Preferred Stock vs. Common Stock

Introduction

When people talk about buying stock, they usually mean common stock. But many companies also issue preferred stock, which works quite differently. Understanding both can help you see the full picture of how companies raise money.

Common Stock

Common stock gives you ownership in a company and usually voting rights at shareholder meetings. Common stockholders benefit when the company grows, since the stock price can rise significantly. They may receive dividends, but these are not guaranteed and can be cut at any time.

Preferred Stock

Preferred stock usually pays a fixed dividend, similar to interest on a bond. Preferred shareholders get paid dividends before common shareholders. If a company goes bankrupt, preferred shareholders are paid before common shareholders, though after bondholders. However, preferred stock usually does not come with voting rights, and its price tends to move less.

Which Is Better?

Common stock offers more growth potential but more risk. Preferred stock offers steadier income but limited upside. Banks and utilities are among the most common issuers of preferred stock. Most everyday investors focus on common stock, while income-focused investors may add preferred stocks for steady payments.

Conclusion

Preferred and common stocks give investors different ways to own a piece of a company. Knowing the difference helps you choose the investments that best fit your goals!