Both of common stock and preferred stock represent a piece of ownership in a company. However, they have several differences that may affect your investment plan and the possible profit you can gain in the future.
Common stock is the types of stock in which most people invest. It represents a claim on profit (dividend) and confers voting rights. Usually, investors get one vote per share to elect board members.
It provides the biggest potential for long-term gains. However, for the company’s dividend, the company board of directors will decide whether or not to pay out common stockholders’ dividends.
Common stockholders are last in line for the company’s assets. Thus, when the company must liquidate and pay all creditors and bondholders, common stockholders will be the last to receive money after the preferred shareholders.
Different from common stock, preferred stock does not come along with a voting right. Therefore, if you choose preferred stock, then, you do not have a voice in the future of the company.
Yet, the benefit of preferred stock is it similarly function as a bond. So, it is calculated as the dollar amount of a dividend divided by the price of the stock. Often time, it is based on the par value before a preferred stock is offered.
The interest rates affect the par value. Thus, when the interest rates rise, then, the value of preferred stock declines, and vice versa.
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In liquidation, preferred stocks, however, have a greater claim to a company’s assets and earnings.
Moreover, it also gets priority over common stock. In other words, if a company misses a dividend payment, it must first pay the preferred shareholder.
It also has a callability feature. It provides shareholders the right to redeem the share from the market after a predetermined time.