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What is the Difference Between Common Stock and Preferred Stock?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 February 2020
  • Copyright Protected:
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    Conjecture Corporation
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While both common stock and preferred stock provide significant investment opportunities for investors, there are a couple of key differences between the two options that must be considered. The differences basically have to do with the rights and responsibilities of both the investor and the issuer, as well as defining the degree of risk assumed by each party. Understanding these differences between preferred shares and common shares makes it easier for each investor to decide which option is a better fit for his or her financial goals over the long-term.

One of the key differences between common stock and preferred stock has to do with just how much claim the investor has on the assets of the issuing entity when some unusual event takes place. On the one hand, a company enjoying a great deal of unanticipated prosperity will often provide additional dividend payments to stockholders, with holders of preferred stock receiving a higher percentage per share. At the same time, if the company is undergoing financial hardship and eventually closes its doors, holders of preferred shares typically receive some sort of settlement before any type of compensation is offered to investors with common shares.

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Another important difference between common stock and preferred stock is that dividends on preferred shares are typically paid according to a set schedule, even if the company is not doing as well as it has in the past. By contrast, the terms and conditions related to common stock may allow the company’s board of directors to delay dividends to stock holders for a period of time. This particular difference leads many to consider preferred shares to be a type of fixed-income security, while common stock is more of a risk in term of realizing returns on an consistent basis.

While both common stock and preferred stock can be excellent investment opportunities, it is important for an investor to match his or her personal investment strategies with the right option. Doing so makes it easier to manage the portfolio effectively, and also can reduce the degree of risk that the investor assumes as part of the options purchase. For this reason, it is important to look closely at the financial stability of the issuer, consider the movement of the value of both types of shares in the marketplace for at least the last few years, and evaluate the future prospects of the issuer in terms of remaining a profitable enterprise. Once answers to these questions are determined, the investor can decide between shares of common stock and preferred stock, and determine which type is the best option to pursue.

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