What is the difference between Preferred and Common stock?

stock

The market is heating by the second. Traders and investors interested in playing the game and testing their luck more than ever and yet for beginners, it turns out to be quite the ordeal. Lack of proper and crisp knowledge can often lead you into a downward spiral and end your path here even before it begins. Hoping to win at the game is quite the dream, but you can’t become a player without knowing the rules and undertakings. The stocks themselves can confuse you with their minor details and decept into making impulsive and foolish decisions. Trying your luck might be one thing, but let’s hope by the end of this, you know how to turn your luck around.

Today, we answer or try to answer a basic question, what is the difference between a preferred stock and a common stock?

Now when one wants to issue stocks or invest, one needs to think about how the dividends will be handled, will the shareholders get a vote in the decision making process and what financial rights you want them to have. To start off with the basics, a stock is anything you buy which gives you a certain portion of the said company I.e you own a part of it, depending upon the price and size of the stock, hence you are a shareholder. A common stock is the generalized most common stock people often refer to, widely held equity. It gives you two important advantages which are capital appreciation and dividends. Capital appreciation is when the rising share prices in the growing market often lead to you increasing your profit earning by selling the stocks at the increased prices. Dividends are also paid to shareholders from current or retained earnings yet as they seem to hinder the growth of the company, they aren’t guaranteed. They also have the additional advantage of getting to vote and have a say in the decision making of the board regarding company issues and leadership. Basically they are a part of the growth and profits of the company.

Preferred stock is not as advantageous but is a stable investment instead with a guaranteed dividend as it isn’t directly connected to the changing tides and prices of stocks in the market. The holders of these stocks get priority during the payment of dividends as well, for example when the company gets liquidated. In case of bankruptcy, they also get a fair share of assests by priority distribution. They however have no voice, per say, no voting rights. So while the holders of common stock are more active and in the front, the preferred stock holders are laid back and come into the picture only sometimes, but when they do, it’s usually with a bang. These were some of the basic differences between a preferred and common stock and hopefully, it gave you a perspective. The market has so much to offer and so much is left for you to learn. Yet, time is fleeting and it’s now that you should test your luck and get into the game. Once you’re in, it’s going to be the ride of your life, so what are you waiting for? The market waits!

Anum

Anum Yoon is the founder and editor of Current on Currency. She loves all things personal finance, which is why you'll find her work all over the PF blogosphere.

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