Though there are several types of stock, common stocks and preferred stocks are the two main categories sold by companies and traded by investors on the open market. Understanding the differences between the two can help you make more informed decisions as a new investor. Read on to learn more about common stocks, preferred stocks, their benefits and disadvantages, and the differences between the two.
What Are Common Stocks and Preferred Stocks?
If you’re new to stock trading, it’s important to understand the two main types of stocks: common stocks and preferred stocks. Both common and preferred stocks refer to a share of ownership in a public company. Whereas common stocks are great for long-term growth, preferred stocks are a good option for income investors since they provide you with a steady stream of income.
Pros and Cons of Common Stocks and Preferred Stocks
When deciding between investing in common stock or preferred stock, it helps to understand the benefits and disadvantages that come with both. Here are the pros and cons that come with each:
The main benefits you get with common stock are voting rights and the potential for a higher, long-term return. On the downside, dividends aren’t always available with common stocks. If they are, they tend to be lower and not guaranteed. In addition, the stock price and dividend may have more volatility with a common stock compared to a preferred stock. This means there’s a great chance of the market rising and falling more than one percent over an extended period in relation to the stock’s dividend.
One of the main benefits that come with preferred stocks is that they often yield higher, fixed, and guaranteed dividends. Unlike common stocks, the share price of a preferred stock is less likely to face volatility. In addition, if a company goes bankrupt, you have a better chance of recovering than if you invested in a common stock. Despite these advantages, preferred stocks also come with a lower long-term growth potential and no voting rights.
Common Stocks Vs. Preferred Stocks
Though they’re both securities that trade through brokerage firms, their individual qualities differ. Here are the main differences between common stocks and preferred stocks:
- Voting rights: When you invest in common stocks, you gain the ability to vote on corporate issues such as electing someone to the board of directors. Typically, you get one vote per share of ownership. In contrast, preferred stocks don’t give you a say in the company’s future.
- Dividends: Whereas preferred stocks have fixed dividends, common stocks don’t always have dividends. If they do, they’re variable and declared by the company’s board of directors.
- Value of shares: With preferred stocks, the value declines as interest rates rise. In comparison, the value of common stock shares is regulated by the market participant’s supply and demand.
Now that you understand what both of these stocks are and how they differ, you can weigh your stock options more strategically. Consider the benefits of common and preferred stocks and determine which is a more worthwhile investment.
Interesting related article: “What are Shares?“