Preferred and common stocks are the two types of stocks sold by companies and traded by investors. Though owning both give holders ownership in a company, they vary significantly. In this article, we will talk about these stocks and see the differences between them.
What is a preferred stock?
This is a less common type of stock and holders of this stock don’t have voting rights in a company’s general annual meetings. In other words, if you own preferred stock of a firm, you can’t vote or voice your opinion for any decision undertaken by the company’s management.
That being said, if you are a preferred stockholder, you will receive a fixed dividend at a pre-defined interval for a specified period of time. Also, in case the company goes into liquidation, as a preferred stockholder, you will get priority over common holder. Simply put, you will be paid first than a common stockholder.
These stocks are comparatively less volatile in nature. This, in turn, reduces their potential to earn profits in the long run. There are several sub-categories of preferred stocks namely:
- Redeemable and irredeemable stocks
- Cumulative and non-cumulative stocks
- Convertible and non-convertible preferred stocks
What is a common stock?
Common stock is more common in nature. Owning this stock gives you the voting right in a company’s general annual meeting. You can have your say in the decision of a company’s management, if you own a common stock on issues such as appointment or removal of directors and acquisition and disposal of assets among others. Also, the number of votes is directly related to the number of shares owned.
However, note that though you are entitled for a dividend, the amount is variable and depends on the discretion of the management. In other words, it’s not fixed unlike a preferred stock. It is important to note that in an event of liquidation, the company will give you preference after paying the bond and preferred stockholders.
Common stocks have the potential to offer profits through capital gains. Also, they are little more volatile than preferred stocks. Additionally, common stocks don’t have any sub-categories as such.
The table given below captures the major differences between both these stocks for a better understanding on various parameters:
|Parameters||Preferred stock||Common stock|
|Dividend pay out||Fixed at a pre-defined interval||Variable. Depends on the management’s decision|
|Risk and returns||Low||High|
Both preferred and common stock have specific purposes and warrant a place in your portfolio. Before investing in any of them see the company fundamentals and gauge your risk appetite before investing.
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The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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