Preferred vs. Common Stock: What's the Difference?

Are you ready to level up your investment game? Then buckle up, because we’re about to delve into the world of stocks. But wait, there are two types of stocks to consider: preferred and common stock. Don’t worry, we’ve got you covered! In this article, we’ll break down the differences between these two types of stocks, and help you weigh the pros and cons and risks and benefits of each. By the time we’re done, you’ll be a stock investing pro!

What’s the Difference?

Preferred stock is a type of security that pays investors, usually in the form of dividends, before common stockholders receive any payment. Preferred stock also typically has priority over common stock when it comes to dividend payments, liquidation rights, and voting rights. Common stock provides holders with no guaranteed return and may or may not have the right to vote on certain issues, depending upon the issuing company’s charter.

An Overview of Preferred Stock

Preferred stock is a type of stock that gives shareholders a higher claim on the company’s assets and earnings than common stockholders. This means that in the event of bankruptcy or liquidation, preferred stockholders have priority over common stockholders when it comes to receiving payouts.

Pros:

Typically pays a fixed dividend, providing a steady stream of income for investors.
Preferred stockholders have a higher priority claim on company assets, providing a layer of protection in the event of bankruptcy or liquidation.
Preferred stock can be less volatile than common stock, making it a more stable investment option for risk-averse investors.

Cons:

Generally, preferred stock does not offer as much potential for capital appreciation as common stock.
Dividends can be suspended if the company experiences financial difficulties, meaning that preferred stockholders may not receive their expected income.
Limited voting rights – preferred stockholders usually don’t have as much say in company decisions as common stockholders.

An Overview of Common Stock

Common stock is the most widely known type of stock and represents ownership in a company. Common stockholders have the right to vote on important company decisions and receive a portion of the company’s earnings through dividends or capital appreciation.

Pros:

Potential for higher capital appreciation – if the company performs well, the value of common stock can increase significantly.
Common stockholders have voting rights, allowing them to participate in the decision-making process of the company.
Dividends may increase over time if the company is successful.

Cons:

Common stockholders are lower in priority than preferred stockholders when it comes to receiving payouts in the event of bankruptcy or liquidation.
Dividends are not guaranteed – companies can choose not to pay dividends even if they are profitable.
Common stock can be more volatile than preferred stock, making it a riskier investment option.

Why Not Have Both?

Investors looking to benefit from both potential income and capital appreciation may choose to invest in both preferred and common stock.

This strategy can help diversify an investment portfolio, while still providing the investor with some level of protection in the event of bankruptcy or liquidation. However, it is important to understand the risks associated with each type of stock before making any investment decisions.

Can Anyone Invest in Preferred or Common Stock?

Yes, anyone can invest in preferred and common stock. However, it is important to do your research before investing and be aware of the risks associated with each type of stock. It is also important to understand the company’s financials, its competitive landscape, and the outlook for its industry before purchasing any stocks.

Investor Fraud and How to Avoid It

Unfortunately, investor fraud is a risk when it comes to investing in stocks. Here are some things to look out for to prevent large investment losses:

Be wary of unsolicited offers or high-pressure sales tactics – legitimate investment opportunities are rarely offered this way.
Do your research – make sure to thoroughly investigate the company and its financial history before investing.
Avoid “get rich quick” schemes – these are often scams that promise large returns with little effort.
Stick with reputable investment advisors or brokers – make sure they are registered with the SEC or other regulatory agencies.
Don’t invest in something you don’t understand – if something sounds too good to be true, it probably is.

There are No Good or Bad Investments

Investing in preferred or common stock can be a great way to make some money, but it is important to remember that there are no guarantees when it comes to the stock market. It is crucial to do your research and understand the risks associated with each type of investment before making any decisions.

Remember:

Preferred stock is generally less volatile and offers a more stable source of income than common stock, but may not offer as much potential for capital appreciation.
Common stock has the potential for higher returns but is also more volatile and carries a greater risk of loss.
Both types of stock have their own unique pros and cons, so it’s important to consider your own risk tolerance and investment goals when deciding which to invest in.
Fraud is a risk when it comes to investing, so be sure to do your research and avoid anything that seems too good to be true.

Preferred vs. Common Stock: What’s the Difference?