Common vs Preferred Stock: Difference and Comparison

Shareholders in a corporation may own either ordinary stock or preferred stock, which together make up the company’s securities and assets.

They are both components of a business’s ownership structure, as well as instruments that investors demand from a company in return for their financial contributions.

Key Takeaways

1. Common stockholders have voting rights, while preferred stockholders do not.
2. Preferred stock has priority over common stock for dividend payments and company asset distribution.
3. Dividends for preferred stock are fixed, whereas common stock dividends can vary based on company performance.

Common vs Preferred Stock

Preferred Stock gives no voting rights to shareholders, while common stock does. Preferred stockholders are paid before common stockholders receive dividends. Lastly, Preferred stockholders have a higher dividend yield than what common stockholders or bondholders receive.

Common stock offers investors a piece of a company’s ownership. Many businesses only issue common stock, and common stock sells for a lot more on stock markets than preferred stock.

The Common stockholders have the ability to vote on the board of directors and approve key business decisions such as mergers and acquisitions (although some companies have a non-voting class of common shares).

Preferred stock is more similar to a bond than an ordinary stock.

Preferred stock dividends are considerably larger than common stock dividends and are set at a particular pace, while common stock payouts may fluctuate or even be eliminated.

The Preferred stock also has a fixed redemption price that a business will pay to redeem at some point in the future.

This redemption value, like the maturity value of a bond, sets a limit on how much-preferred stock investors are prepared to pay.

Comparison Table

Parameters of Comparison	Common Stock	Preferred Stock
Held to Maturity Value	It varies.	It is full.
Voting Rights	Contains the right to vote.	Does not contain rights to vote.
Call Feature	Does not contain a call feature.	It has a call feature.
Payment of dividends	Dividends aren’t set in stone or required.	Dividends are required and are, for the most part, set. It should be paid before dividends are given to common stockholders.
Liquidation of Company	In the event of the company’s collapse, they are paid last in line.	Given preference more than common stocks.

What is Common Stock?

The most common kind of stock is common stock, which reflects a company’s shares of ownership. When people talk about stocks, they refer to common stock.

In fact, this is how a lot of stock is distributed. Ordinary shares are a claim on profits (dividends) and also allow you to vote.

Investors elect board members who oversee management’s important decisions with one vote per share.

Compared with preferred shareholders, shareholders have a greater influence on business policies and management issues.

Bonds and preferred stocks tend to perform worse than common stocks. It’s also the kind of stock with the best long-term growth prospects.

If a company performs well, the value of its common stock may increase. Keep in mind, however, that if the company performs poorly, the stock’s value will fall as well.

When it comes to dividends, a company’s board of directors decides whether or not to pay them to ordinary shareholders.

When a company fails to pay a dividend, the ordinary shareholder loses out in favour of preferred stockholders, suggesting that the latter has a greater priority.

What is Preferred Stock?

Preferred shareholders, as a result, have no voice in the company’s future when it comes to electing a board of directors or voting on corporate policies.

Preferred stock, like bonds, provides investors with a guaranteed income for the rest of their life. Divide the dividend amount by the stock’s price to get the dividend yield of the preferred stock.

The par value is used to determine whether or not a preferred stock should be issued. It’s calculated as a percentage of the current market price after it begins trading.

A common stock, on the other hand, pays a fluctuating dividend that is announced by the board of directors and is never guaranteed. In fact, many companies do not pay dividends to ordinary shareholders.

The face value of preferred stocks (such as bonds) is affected by interest rates. Preferred shares depreciate as interest rates rise and vice versa.

On the other hand, the supply and demand of market participants will affect the value of the common stock.

Main Differences Between Common and Preferred Stock

1.  The Value, if Held to Maturity, varies in the case of common stocks and is full in the case of preferred stocks.
2. Common stocks contain the right to vote, whereas Preferred stocks do not contain the right to vote
3. Common Stock has a call feature, whereas preferred stocks do not contain a call feature.
4. Dividends aren’t set in fixed or required in the case of common stocks, whereas in preferred stocks, dividends are required and are, for the most part, set. It should be paid before dividends are given to common stockholders.
5. In the event of the company’s collapse, common stocks are paid last in line. Preferred stocks are given preference more than common stocks.

References

1. https://www.sciencedirect.com/science/article/pii/0165410186900030
2. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/pnlr161&section=49