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Common Stock vs. Preferred Stock
Common stock and preferred stock are the two main types of stocks that are sold by companies and traded among investors on the open market. Each type gives stockholders a partial ownership in the company represented by the stock.Despite some similarities, common stock and preferred stock have some significant differences, including the risk involved with ownership. It’s important to understand the strengths and weaknesses of both types of stocks before purchasing them.
Common Stock
Common stock is the most common type of stock that is issued by companies. It entitles shareholders to share in the company’s profits through dividends and/or capital appreciation. Common stockholders are usually given voting rights, with the number of votes directly related to the number of shares owned. Of course, the company’s board of directors can decide whether or not to pay dividends, as well as how much is paid.
Owners of common stock have “preemptive rights” to maintain the same proportion of ownership in the company over time. If the company circulates another offering of stock, shareholders can purchase as much stock as it takes to keep their ownership comparable.
Common stock has the potential for profits through capital gains. Shareholders are not assured of receiving dividend payments. Investors should consider their tolerance for investment risk before investing in common stock.
Preferred Stock
Preferred stock is generally considered less volatile than common stock but typically has less potential for profit. Preferred stockholders generally do not have voting rights, as common stockholders do, but they have a greater claim to the company’s assets. Preferred stock may also be “callable,” which means that the company can purchase shares back from the shareholders at any time for any reason, although usually at a favorable price.
Preferred stock shareholders receive their dividends before common stockholders receive theirs, and these payments tend to be higher. Shareholders of preferred stock receive fixed, regular dividend payments for a specified period of time, unlike the variable dividend payments sometimes offered to common stockholders. Of course, it’s important to remember that fixed dividends depend on the company’s ability to pay as promised. In the event that a company declares bankruptcy, preferred stockholders are paid before common stockholders. Unlike preferred stock, though, common stock has the potential to return higher yields over time through capital growth. Remember that investments seeking to achieve higher rates of return also involve a higher degree of risk.
Both common stock and preferred stock have their advantages. When considering which type may be suitable for you, it is important to assess your financial situation, time frame, and investment goals. The return and principal value of stocks, both common and preferred, fluctuate with market conditions. Shares, when sold, may be worth more or less than their original cost.
This material was written and prepared by Emerald. © 2012 Emerald Connect, Inc. All rights reserved
George Elkin and Jason Saladino are Registered Representative offering Securities through American Portfolios Financial Services, Inc. Member: FINRA, SIPC. Investment Advisory products/services are offered through American Portfolios Advisors Inc., an SEC Registered Investment Advisor. G.R. Reid Wealth Management Services, LLC is not a registered investment advisor and is independent of American Portfolios Financial Services Inc. and American Portfolios Advisors Inc.
Unless specifically stated otherwise, the written advice in this memorandum or its attachments is not intended or written to be used for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
Information is time sensitive, educational in nature, and not intended as investment advice or solicitation of any security.
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