Business Common Stock and Preferred Stock

Stock is partial ownership of a corporation. Both preferred and common stocks are common investments in the stock market. Preferred and common stocks are partial ownership of a corporation. Both can be purchased from most stock brokers. The differences between the two are explained in this article. 

Common stocks are also called ordinary shares. One of the main features of common stock is the right to vote. They elect the board of directors and vote on corporate affairs. Common stock holders get one vote per share they own.  Common stock is more risky than preferred stock because they only have rights to a corporation’s assets after a liquidation if it files bankruptcy after creditors, bondholders, and preferred stock holders have been paid.  However, common stocks usually yield higher returns than other investments.  The economy and profits of the corporation have an effect on the price of the shares of stock. Most stocks sold on the stock market are common stocks, although preferred stocks are not scarce. Common stocks can have pre-emptive rights.  This means a common stock holder with pre-emptive rights can buy the same percentage of stocks he owns if the corporation issues new stock.       

Preferred stocks are also called preferred shares, preference shares, and preferreds. One of the main features of preferred stocks is guaranteed dividends.  These dividends are usually fixed.  An example of a dividend is if the dividend is semi-annual and 3 percent of the par value and the par value is $50, then a dividend of $1.50 is paid twice yearly.  Common stock, however, has only variable dividends that are not guaranteed. Preferred stocks get paid before common stock in the event of a liquidation due to bankruptcy, but are paid after the creditors of the corporation. 

Preferred stocks do not usually have voting rights.  They might the drawback that they are “callable”, meaning they can be purchased from the shareholders by the corporation. A premium is usually added to the price per share of the preferred stock in the event of a re-purchase by the corporation.  Sometimes preferred stock can be converted to common stock.  If it can be changed to common stock, it is called convertible preferred stock.  A Certificate of Designation is issued explaining the conditions. 

Preferred stock prices rise when interest rates fall and their prices fall when interest rates rise. This is similar to the behavior of the prices of bonds.  A corporation might issue preferred stock instead of common stock if it needs additional financing because it will not have to issue dividends until it has declared the dividends and preferred stock is less volatile than common stock.