Let’s make this very easy to understand, picture two people walking into a business. One walks in through the front door with a broad smile, ready to help make decisions and get involved. The other walks in through the VIP lounge, gets priority treatment, and doesn’t need to say much to get value.
That’s the simplest way to think about common stock and preferred stock. Both represent ownership in a company, but they come with different rights, rewards, and risks. If you’re thinking of investing, understanding the difference between these two types of stocks can help you make wiser decisions.
In this blog post, I will walk you through the differences between Preferred Stock and Common Stock.
What Is Common Stock?
This is the most popular type of stock. In fact, when most people talk about stocks, they’re talking about common stock.
Owning common stock means:
- You have voting rights (you get a say in major company decisions, like electing board members).
- You can earn dividends (if the company chooses to pay them).
- You benefit if the company’s share price increases.
But if eventually the company runs into trouble or shuts down, and go bankrupt common shareholders are the last to get paid after debt holders, bondholders, and preferred shareholders.
So yes, common stock offers the highest potential upside but also comes with the most risk.
Picture common shareholders as passengers sitting in economy class. You’re on the same plane, but if anything goes wrong, you’re not first in line for food or comfort.
What Is Preferred Stock?
Preferred stock is a little different. It’s often described as a mix between a stock and a bond.
Owning preferred stock means:
- You usually don’t have voting rights.
- You receive fixed dividends (think steady income).
- You get paid before common shareholders if the company is paying dividends or is liquidated.
Preferred stockholders are like business class passengers. You don’t necessarily get to fly the plane, but your seat is more comfortable, and you’re served first.
What Is The Difference Between Preferred Stock and Common Stock?
The price of preferred stocks doesn’t bounce up and down as wildly as common stocks. But they also don’t grow in value as much. They’re more about stability than big gains.
1. Voting Rights
- Common Stock: Usually comes with voting rights, so you can help make decisions like electing the board of directors.
- Preferred Stock: No voting rights in most cases. You’re more of a silent partner.
2. Dividends
- Common Stock: Dividends are not guaranteed. The company may pay them—or not—depending on profits.
- Preferred Stock: Dividends are fixed and regular, like getting a set monthly or quarterly payment.
3. Priority During Liquidation
- Common Stock: You’re last in line if the company goes out of business. Debts, bonds, and preferred stock get paid first.
- Preferred Stock: You have higher priority over common shareholders if the company is liquidated.
4. Price Volatility & Growth Potential
- Common Stock: More volatile but with higher potential for price growth over time.
- Preferred Stock: More stable but usually offers less potential for big price increases.
5. Convertibility
- Common Stock: Stays as common stock. No conversion.
- Preferred Stock: Sometimes convertible into common stock, depending on the terms.
6. Risk Level
- Common Stock: Carries a higher level of risk. Because you’re last in line for payouts and dividends aren’t guaranteed, your returns depend heavily on the company’s performance in the stock market.
- Preferred Stock: Considered lower risk compared to common stock. The fixed dividend and priority during liquidation provide a layer of financial security — it’s often seen as a “safer” middle ground between bonds and stocks.
7. Appeal to Investors
- Common Stock: Attracts investors looking for long-term growth and those who want a voice in company decisions. Ideal for those willing to take on more risk for potentially higher rewards.
- Preferred Stock: Appeals to income-focused investors (like retirees) who prioritize steady returns and don’t mind giving up voting power for stability and reliable income.
Which One Should You Choose Between Common and Preferred Stock?
The answer depends on what kind of investor you are. But you can also put this into consideration;
1. Are You in It for Growth?
If you want to build wealth over time and you’re okay with taking on some risk, common stock is probably a better fit. It gives you a chance to benefit from share price increases, and even influence company decisions.
2. Are You in It for Income?
If you prefer steady, predictable income and less price drama, preferred stock may be more suitable for you. It’s especially appealing if you’re nearing retirement or you want a low-risk portfolio balance.
Conclusion
In the world of investing, not all stocks are created equal. Common stock puts you in the heart of the action with voting power and potential for growth, but it also comes with more ups and downs. Preferred stock gives you calm, regular dividends, less volatility, and higher priority if things go south.
The right one for you depends on your personal goals. Are you aiming for long-term growth or steady income? Do you prefer excitement or predictability? The good news is you don’t have to choose just one. You can actually choose both.