Common stock refers to the share of ownership of a firm. Preferred stock also involves the property of a share, but it is entirely different when compared to common stock. The common stockholder has the right to vote in company matters when some issue arises whereas the preferred stock does not give an individual voting right.
When a company starts making profits, they pay the dividends first to the preferred stockholders and then to the common stockholders. The common stockholders are also known as equity shareholders. Such individuals have the right to sell their stocks to other buyers and make profits. This is a considerable benefit available to the common stockholders over the preferred stockholders. It enables them to make huge profits and become prosperous. If an organization resolves to liquidate, the common stockholders are paid their shares in the company but only after paying off the liabilities and the preferred stockholders.
The dividends for the preferred stockholders remain stable even if the profits of the corporation increase. For the equity shareholders, there is an increase in the dividend as the financial gain increases. If a company has a loss, the preferred stock receives the fixed dividends, but the common stockholders receive dividends only if there is some amount left. So, it may happen that the common stockholders do not receive any money. If a firm does not pay the dividends to the preferred stockholders due to some reason, they are liable to pay the debts the next year.
The equity shareholders can’t enjoy this unique benefit. The growth potential of the equity shareholders is much higher than the preferred stockholders whose profits do not increase along with the surplus gain of the organization. Common stockholders are not given any priorities as they are considered as a member of the corporation whereas the preferred stockholders are given preferences over the equity shareholders.
The common stocks are preferred by a person who wants to become wealthy soon and who wants to double the money. However, it has its risks. For a person who is not willing to take risks and would like to have a fixed sum annually so to have a secure life prefers a preferred stock. Both the stock comes with its benefits and risks.
There are two major types of stock. One is common stock and the other one is preferred stock. When the business is in need of capital and wants to raise fund by attracting the prospective investors, then it can be done by issuing stocks which can be either: common stock or preferred stock. A business can make the offering of the stocks for sale via different stock exchanges. Both common, as well as preferred stock, are good for making investments. All that you need to take care off is your exact needs. It may be the case that a particular class of stock proved to be a better choice when compared to the other for a particular set of the investor. Before you decide to make an investment in any type of stock, it is important for you to understand the difference between the two.
The above are some of the common differences which exist between common stock and preferred stock which are issued by a company.