Gerald Dewes : Common stock and preferred stock are the two main types of stocks that serve as tools that can be used to profit from the company’s future growth. Both of these stock types represent proportionate ownership in the company’s business.
Common stock and preferred stock have their own pros and cons and significant differences, including the risk involved with ownership. It’s important to understand the advantages and disadvantages related to both types of stocks before purchasing them. Most investors know about common stock in much detail as compared to preferred stock.
Common Stock
Common stock is the most common type of stock that is issued by corporations. It entitles the shareholders to share in the company’s profits either by means of dividends or capital gains upon shares’ disposal. A great majority of stocks is issued in this form and it’s the stock most of the people invest in. Common stockholders are usually given voting rights, with the system of one vote per share owned. They can elect board members to oversee managerial decisions and thus as a result, have control over corporate policies. However, it’s ultimately the decision of the board of directors to decide whether or not to pay dividends and how much is to be paid.
Common stockholders have “preemptive rights” to maintain the same proportion of ownership in the company over a period of time. In other words, these shareholders can purchase as much stock as it takes to keep their ownership comparable when the company circulates another offering of stock.
Common stock outperforms bonds and preferred shares and it has the potential for profits through capital gains. Keep in mind that the return and principal value of stocks fluctuate with changes in market conditions. Common stocks, when sold, may be worth more or less than the price on which they got purchased. Common stockholders are not assured of receiving regular dividend payments.
Preferred Stock
Preferred stock is generally considered safer than common stock but typically is less profitable than common stock too. Preferred stock’s dividend yield is calculated as the dollar amount of a dividend divided by stock price, often based on the par value before a preferred stock’s offering. Preferred stockholders generally do not have voting rights, as common stockholders do, meaning they have no say in managerial decisions or company’s policies but they have a greater claim to the company’s assets. Preferred stock may also have a “callability feature,” unlike common stockholders, which means that the company can redeem those shares back from the shareholders at any time for any reason, usually at a favorable price.
Preferred shareholders receive fixed amounts of dividends periodically and before common stockholders. Preferred shareholders receive fixed, regular dividend payments for a specified period of time whereas variable dividend payments are offered to common stockholders. If a company declares bankruptcy, preferred stockholders are paid prior to common stockholders. Moreover, preferred stocks can get converted to a fixed number of common stocks but it’s not vice versa. Common stock has potential to yield higher returns over time by means of capital growth, unlike preferred stock. But remember that higher rates of return also involve a higher degree of risk.
At the end of the day, both common stock and preferred stock have their own advantages and disadvantages. Assess your financial goals, time frame, and investment risk tolerance level when considering which investment type suits you the most.
The information in this newsletter is not intended as tax, legal, investment, or retirement advice or recommendations, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek advice from an independent tax or legal professional. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. T
IMPORTANT DISCLOSURES
Gerald R. Dewes does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
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