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Difference between Common and Preferred Stock

Stocks, as defined by Investopedia, is a security that represents the ownership of a fraction of a corporation. This means that the shareholder will be entitled to a portion of the corporation’s assets and profits according to how much stock they own.

If you have ever wanted to own a piece of a successful business, you can simply do so by buying the company stock. However, it is important to note that there are two types of stock: common and preferred. Even though both types of stock can be a worthwhile investment, there are many differences between the preferred and common stock.

Let’s start off with the common stock. Common stock gives investors an ownership stake in a company and it ensures that all shareholders have the same rights for each share that they own. Common stockholders typically have the right to vote on major decisions and the power to vote when electing the board of directors. These rights are based on the number of shares owned, not on the number of owners. For example, if a shareholder owns 1000 shares, he is entitled to 1000 votes. While if another shareholder owns 10 shares, he is entitled to 10 votes. What makes this type of stock attractive is its ability to achieve capital gain as the value can rise drastically overtime when the company grows and become more profitable.

On the other hand, we have preferred stock. When it comes to dividends, preferred stockholders have priority over common stockholders. Preferred stock’s dividends are fixed at a certain rate or set in terms of the benchmark interest rate and therefore, are usually much higher than the dividends issued to a common stockholder as they can change or even get cut entirely. In the event of a liquidation, preferred stockholders’ claim on assets is greater than common stockholders. The downside to preferred stock, however, is that they have no voting rights and limited potential for capital gains.

Ultimately, both stocks have their pros and cons, and at the end of the day. The table below summarizes the key differences between common and preferred stock.

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Now, it all boils down to your personal investment objectives and goals – whether you would rather receive the income now, or as a long-term return for the future.

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