Common vs. Preferred stock. The pros and cons

Stocks are not all created equal. Publicly-traded corporations typically issue preferred and common stock, both of which have advantages and disadvantages. To better understand each type, we’ll take a look at their strengths and flaws.

Common stock

Common stock is not just common in the name; it’s the most popular stock among investors. Ownership rights are conferred on shareholders, and they can vote on critical decisions such as those pertaining to the election of the company’s board of directors. Some policy and management decisions are made with their input as well, of course. One vote is typically allotted for each share. Common stock’s worth tends to be derived more from the increase in the share price over time as opposed to dividends when compared to preferred stock’s value.

The long-term growth potential of common stock outweighs the lower priority given to dividends and payouts in the case of liquidation to common stockholders. Suppliers, lenders, preferred shareholders, and debtors come first in the payout order. Preferred stock, on the other hand, has a much lower risk of going to zero.

Long-term investors are more likely to benefit from common stock.

Pros

It confers the right to vote.

There is no upper limit to how high the stock price can rise.

Until the stock is sold, capital gains are exempt from taxation.

Cons

Volatility in the market

It is possible to receive no dividends.

Preferred stockholders receive dividends first, followed by holders of common stock.

In the event of a liquidation, preferred shares take precedence over common stock.

Preferred stock

In the case of preferred stock, stockholders receive a set dividend and are given first preference over common stock if the stock is repurchased. The majority of investors do not necessarily choose preferred stock, despite its name.

Preferred stock resembles a bond in many respects. If you’re looking at a preferred stock, dividends are usually the primary source of return. The yield on these investments is typically higher than that of common stock. Preferred stock, like bonds, performs better when interest rates fall. When it comes to preferred stock, the term “par value” refers to the value at which the stock was initially issued and at which it can normally be redeemed when the preferred stock matures.

A predetermined date can be set for the “call” (i.e., the company’s redemption) of preferred stock. Consequently, there is a chance that the call price will be higher than what the investor paid. Preferred stock can be converted into a predetermined number of common shares, but not the other way around. This is a unique feature. Convertible preferred stock is the name given to this sort of stock.

Short-term investors who can’t keep ordinary stock for long enough to weather market declines may find that preferred stock is a better option. Preferred stock has less volatility than common stock, but it also has less long-term growth potential than the latter.

Pros

Receives a payout that is higher than the dividends paid by common shares. ‘

Having a lower risk of devaluation

Receives dividends before common stock in the event of a liquidation.

Cons

Limits on share price growth usually apply only up to the redemption value

Voting rights are not always granted.

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