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What's the difference between common and preferred stock?

There are many differences between common stock and preference stock. Let's examine a few of them:

Dividends

Preferred stock holders usually get a guaranteed dividend irrespective of how the company performs.

Common stock holders dividends are usually related to the amount of profit the underlying company makes.

Price volatility

Prices of common stock in many companies are often very volatile. Factors such as the economy, market share, profit and brand loyalty often affect the price of common stocks.

The biggest factor to affect the price of preferred stock is often interest rates. When interest rates rise, preferred stock prices often fall to a reduced demand.

Voting Rights

Common stock holders get voting rights. It is often one vote for each share owned. On the flip side owners of preferred shares do not get any voting rights.

If things go wrong

If a company goes bankrupt, being a preferred stockholder is a much better deal. As a preferred stockholder, you are higher up in the queue for distributing the assets that remain.

Common stock holders do not receive anything unless preferred share holders are fully compensated. Then and only then are common stock holders entitled to anything.

Risk and Profit potential

Common stocks usually offer the greater potential for profit. A common stockholder can profit from both price rises in a stock and dividends. However, price rises and dividends are not guaranteed.

Blue chip stocks are often considered to be relatively low risk, but large fluctuations in these companies is not unheard of.

Preferred stocks are usually much safer as a fixed dividend amount is often set out on purchase. However, preference stock do not have the same opportunity to profit from rises in the price of the stock. They also are not exposed to the risk of the stock price collapsing.

On balance preferred stocks are much safer than common stock, but they generally have a much lower profit potential.

Buying stocks

Both common stock and preferred stock can be purchased from most of the big mainstream stock brokers like Zecco and Tradeking.