The world of investing can be a confusing place for new investors. Many beginning investors can struggle with the language of the stock market, and may be confused as to the best avenue for investing for their situations.
One of the main issues for new investors is the difference between common and preferred stock, and how this can affect their returns on their investments.
There are many differences between common stock and preference stock, and it is important for investors to weigh the pros and cons of each type of stock in order to make an informed purchase. Let us take a moment and examine a few of the differences between these two types of stocks:
What’s The Difference Between Common And Preferred Stock? 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.
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. Common stocks are also subject to swings in the broad market, in some cases unrelated to the actual performance of the company.
The biggest factor that affects the price of preferred stock is often interest rates. When interest rates rise, preferred stock prices often fall to a reduced demand.
Common stock holders get voting rights. It is often one vote for each share of common stock owned. On the flip side owners of preferred shares do not get any voting rights in the company.
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, meaning that you have a better chance of recouping at least a portion of your investment.
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. Unfortunately, in some cases, no matter what type of stock you own, it is possible to lose 100% of your financial investment in a company.
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.