What Is The Difference Between Common Stock And Preferred Stock?

As investors and traders, it's important that we know as much about the stock market as possible. That includes understanding the differences between various types of securities.

You probably already have a good grasp on what a stock is, but you might not know that there’s more than one type of stock.

When companies become publicly listed on a stock exchange, investors then can buy pieces of a company called stocks or shares. However, there are two types of stocks or shares a company may offer to the public: Common or Preferred.

In this article, we’ll break down these two types of stock shares: what they are, and key differences between the two.

So, what are the differences between the two stocks?

Common Stock

It entitles the owner to vote a shareholders' meetings (proportionate to the amount they own) and to receive dividends.

• Majority of stocks issued in the stock market come in this form.
• Shareholders are last paid after creditors, bondholders, and preferred shareholders.
• Incase of company achievements like major innovation or acquisition. Such news will make the common stock price go through the roof.
• In terms of risk factor: no set dividend. Erratic payment schedule. Value of the company will depreciate so will the common stock price.

Preferred Stock

It generally does not have voting rights but has a higher claim on earnings and assets.​ Owners of preferred receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.

• Function similar to bonds as investors are guaranteed a fixed dividend.
• Not as abundant in the stock market as common stocks.
• Incase of company achievements like major innovation or acquisition. Such news will have little impact on preferred stock value. Preferred shares have less potential to appreciate in price than common stock.
• In terms of risk factor: guaranteed dividends. Fixed payment schedule. Does not respond to general market volatility. Have first access to assets and arrears when the company is liquidated.