Preferred Stock vs. Common Stock: Which is Better?

What is the difference between Common Stock and Preferred Stock? Not all stocks are created equally. There are actually two main stock types.

Barry D. Moore CFTe

March 5, 2021

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Not all stocks are created equally. There are actually two main stock types, Common Stock and Preferred Stock, each has their pros and cons.

Investing Insights & Research from Liberated Stock Trader — Preferred Stock vs. Common Stock

What is Common Stock?

Common stock is the most commonly available type of stock. This is what you would typically purchase when buying through brokers. It represents a stake in the company. Suppose there are 10 million shares available for a company on the market. If you purchased 1 million of them, this would essentially give you a 10% stake in the business.

Along with purchasing common stock, you will get other benefits such as voting rights and the right to receive any paid dividends. The voting rights will give you voting in the election of the board of directors and corporate policy.

One of the negatives of owning common stocks in comparison to being an owner of corporate bonds, a debt holder, or owning preferred stock is that you are further down in the pecking order to receive your investment back should the company go into liquidation.

The biggest benefit of being a common stockholder is that you will benefit the most from the growth in the share price. Being normally floated on the major indices, common stocks are usually liquid, meaning that there are usually buyers and sellers at hand to ensure the stock is priced fairly.

What is Preferred Stock?

Preferred stock is the type of stock that has more benefits in terms of claims on the business’s underlying assets compared to common stock. It is important to read the small print when buying preferred stock as preferred stocks’ exact rights vary from company to company.

In general, the agreement’s structure will exclude voting rights and include a higher priority on dividend payments versus common stockholders.

One drawback apart from the lack of voting rights is that the preferred stock may not be available on the open market, meaning that it may not appreciate as much common stock and might not have the required amount of liquidity if you wish to sell.

Preferred Stock vs. Common Stock

The key difference between common stock and preferred stock is that common stocks have voting rights for the shareholder, while preferred stock does not have voting rights. Additionally, preferred stock has a prioritized claim on dividend repayments and refunding in case of bankruptcy.