Common vs. Preferred Stock
Stock represents a piece of ownership in a company. Typically, they trade on a public exchange like the New York Stock Exchange or NASDAQ. There are two types of stock, common and preferred. In this article, we will go over the differences in common vs. preferred stock.
Voting Rights
Stock can give you the right to vote on decisions regarding the company’s management, like choosing the board of directors. Common stock always comes with voting rights. Preferred stocks may or may not have voting rights.
Dividends
Dividends are a way that companies distribute their earnings to stockholders. Both common and preferred stock receive them. However, if there are not enough funds for all shareholders to receive dividends, preferred stockholders get paid before common stockholders.
Trading and Price Changes
Both common and preferred stock are traded on the open market. You can purchase or sell either type of share freely. Generally, investors more frequently trade common vs. preferred stock. This is because they are better for long term income streams than short term gains. This is due to the fact that they have less volatility because of their fixed dividends and lower risk profile.
Corporate Bankruptcy
If a corporation goes bankrupt, common stocks receive repayment for their shares after creditors, bondholders, and preferred shareholders.
Convertibility
Depending on the terms, you can convert preferred stocks into common stocks. However, you cannot convert common stocks into another type of security.
Pros and Cons of Common Stock
Common stocks come with both pros and cons. Some of the pros include that they are more frequently traded, offer a higher potential for returns, and have guaranteed voting rights. Cons include, you may not receive dividends, you are in lowest priority in the case of bankruptcy, and there is more price volatility.
Pros and Cons of Preferred Stock
Preferred stock comes with its own set of pros and cons. Some of the pros include having a higher priority over receiving dividends, lower price volatility, and having fixed dividends that will not decrease. Cons include potentially lacking voting rights, lower potential returns, and they are traded less frequently.
Choosing Common vs. Preferred Stock
Choosing common vs. preferred stock does not have to be a one or the other situation. You can use both in your portfolio to bolster your financial plan. Meet with a qualified investment advisor to learn how to do this.
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