Public corporations gain capital by selling stock to the public. When an investor purchases the company’s stock they are investing their funds in the company and will become one of the many stockholders of the firm. Both common stock and preferred stock represent a claim of ownership in a corporation. Owners of either type of stock are entitled to a number of benefits including dividends and capital gains. There are, however, a number of differences between common stock and preferred stock such as the stock holder’s rights, issuer’s responsibilities, risk, dividends payments, voting rights, etc. The article that follows offers a clear explanation of each type of stock and shows how these types of shares are similar or different to each other.
Preferred Stock
Preferred stock is paid a fixed dividend on a periodic basis. Dividends are paid first to preferred stock holders before any dividends payments are made to common stockholders. These stocks are ‘preferred’ and ranked in higher importance when making out payments to the company’s stockholders. The payment of a fixed dividend to preferred stock holders is not a legal obligation and the company can withhold payments to stockholders in the event that financial difficulties are faced. Preferred stockholders do not enjoy voting rights, and since the dividends that they receive are fixed they will not receive additional dividends even during times that the company performs extremely well. There are a number of different types of preferred stock that include convertible preference shares (which can be converted to common stock) and cumulative preference shares (where the unpaid dividend will be accumulated and paid at a later date).
Common Stock
Common stock is the most commonly issued stock that is popular when making initial public offerings. Common stock holders enjoy a number of benefits. Common stockholders have voting rights and can cast votes when making important company decisions, such as in selecting the upper management or board of directors. Common stockholders also receive dividends, and while this amount is not fixed the amount that is received as dividend will depend on how well the company performs. In years that the company performs well the stockholders can obtain higher dividends, but may not receive dividends when the company faces financial troubles. Common stockholders receive dividends after preferred stock holders are paid, and the same applies in the event that the company experiences bankruptcy and when assets are liquidated to pay dues.
What is the difference between Preferred Stock and Common Stock?
Both common stock and preferred stock represent the ownership interest in a firm, and are entitled to dividends and capital gains and can be traded on a stock exchange at any time. There are a number of differences between the two types of stock. Preferred stockholders receive dividends before common stockholders. Preferred stock holders also receive a fixed income, whereas common stockholder’s income will depend on the company’s performance; in the years that the company performs well common stockholders will receive more dividends than preferred stock holders. Common stockholders are entitled to votes, which is not the case for preferred stockholders.
Summary:
Preferred Stock vs. Common Stock
• Both common stock and preferred stock represent the ownership interest in a firm, and are entitled to dividends and capital gains and can be traded on a stock exchange at any time.
• Preferred stock is paid a fixed dividend on a periodic basis, whereas common stockholder’s income will depend on the company’s performance.
• Preferred stock holders are paid dividends first before any dividends payments are made to common stockholders.
• Unlike preferred stock, common stockholders have voting rights and can cast votes when making important company decisions, such as in selecting the upper management or board of directors.