Preferred Stock vs. Common Stock

When a company first issues stock, it may choose to issue both common stock and preferred stock. Before rushing into choosing which one to buy, you will want to understand the key differences between the two types of stock. 

Both types of stock still represent a portion of the company and, roughly speaking, are the same value. In many cases, companies will issue preferred stock to institutional investors rather than retail investors. There are exchanges that will sell preferred stock, but it typically isn’t a good idea for retail investors, and we’ll explain why. 

What Is Preferred Stock?

The biggest difference from common stock is that preferred stock does not come with voting rights in company matters such as voting on board of directors or corporate policies. In addition to this, preferred stock price typically doesn’t fluctuate as much as common stock. Because of this, there is less downside potential for investors.

Many investors see preferred stock as more of a bond, as it also pays dividends. Preferred stockholders enjoy a fixed dividend rate as opposed to common stockholders. In addition to this, they also get priority payment. In the case of a company going bankrupt, they get first dibs on the assets. 

All stock has a par value price. This is legally considered to be the minimum value of the company, and in most cases is considerably lower than the going price of common stock. Preferred stock is usually issued close to the par value, and does not change in price from there. Interest rates typically control the price of preferred stock. When interest rates go up, preferred stock goes down. 

The dividends paid to preferred stock owners are guaranteed, and set in stone. The board of directors cannot change dividend payments for preferred stock, while they can for common stock. This is because common shareholders can vote in company matters, while preferred shareholders cannot.

What Is Common Stock?

Common stock, as its name suggests, is the most common form of stock in which people invest their money. It represents ownership in the company, and gives voting rights. When you buy stock from your online exchange, it’s common stock. Most investors only know about common stock, in fact.

The price of common stock is set by the market, and for that reason can fluctuate based on a whole range of events. Common stockholders also enjoy dividends that are based on the company’s profits, not a set value like preferred stock. This means that there is a lot more upside potential, and downside. Historically, common stock has outperformed bonds and preferred stock when it comes to value and dividend payments. Remember that with great reward comes great risk, and common stockholders are the last in line to get dividends and assets in the case of liquidation.

Most companies offer both preferred and common stock. Preferred stock has a more stable price, close to the par value (legal minimum value) of the company. Common stock’s price is set by the open market, and can be more volatile than preferred stock. Preferred stockholders also get a priority dividend payment, but do not get voting rights.