Understanding Preferred Stocks Versus Common Stock Ownership
When it comes to investing in the stock market, the two most common types of stocks are preferred stocks and common stocks. While both provide ownership in a company, there are significant differences between the two that are important for investors to understand. In this article, we’ll take a closer look at these differences and break down the pros and cons of owning preferred stocks versus common stock ownership.
What are Preferred Stocks?
Preferred stocks, also known as “preferred shares” or “preferred stock shares,” are a type of ownership in a company that has characteristics of both a stock and a bond. Like common stock, preferred stocks represent ownership in a company and have the potential for capital appreciation. However, like a bond, preferred stocks pay investors a fixed dividend rate.
Advantages of Preferred Stocks
One of the primary benefits of owning preferred stocks is the fixed dividend rate. This means that investors can count on a steady stream of income from their investment. Preferred stocks are also given priority when it comes to receiving dividends. In the event of a company’s bankruptcy or liquidation, preferred stockholders are paid before common stockholders.
Another advantage of preferred stocks is their potential for capital appreciation. While preferred stocks don’t typically experience the same level of price fluctuations as common stocks, they can increase in value over time. This is especially true if the market interest rates decrease, making the fixed dividend rate of preferred stocks more attractive.
Disadvantages of Preferred Stocks
One of the biggest drawbacks of preferred stocks is their lack of voting rights. Unlike common stocks, preferred stockholders do not have a say in company decisions and cannot vote at shareholder meetings. This lack of control can be frustrating for investors who want a say in how the company is run.
Additionally, preferred stocks are typically less liquid compared to common stocks. This means that it can be more difficult to buy and sell preferred stocks quickly, which can be a disadvantage for investors who want to make frequent trades.
What are Common Stocks?
Common stocks, also known as “common shares” or “ordinary shares,” are the most well-known type of stock. When you buy a common stock, you are buying a small percentage of ownership in a company. As a shareholder, you have the potential for capital appreciation and can vote on important company decisions.
Advantages of Common Stocks
The main advantage of common stocks is their potential for high returns. Since the value of common stocks can fluctuate greatly, there is a chance for investors to make significant profits if they buy when the stock is low and sell when it is high.
Additionally, common stocks come with voting rights, giving shareholders a say in company decisions and the ability to hold management accountable.
Disadvantages of Common Stocks
One of the biggest drawbacks of common stocks is their volatility. The value of common stocks can fluctuate greatly, making them a risky investment. This volatility can also be stressful for investors who may be more risk-averse.
Another disadvantage of common stocks is that they are last in line when it comes to receiving dividends. If a company goes bankrupt or is liquidated, common stockholders will only receive a dividend after preferred stockholders are paid.
Final Thoughts
Before investing in preferred stocks or common stocks, it’s important to understand the differences between the two and determine which type of stock best fits your investment goals and risk tolerance. Preferred stocks offer a fixed dividend rate and can provide a steady stream of income, while common stocks offer the potential for higher returns and voting rights. As with any investment, it’s crucial to do your research and consult with a financial advisor before making any decisions.
