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The Difference between Common and Preferred Stocks Explained

The Difference between Common and Preferred Stocks Explained

There are two types of stocks in the stock market:  common and preferred stocks. And investors get different kinds of benefits from buying each type of stock.   Though they are quite different in many ways, both of the two types of stocks give partial ownership in the company to the holder of the stock.

If you want to be successful in the stock market, you must be familiar with the things you will and will not get from each of the kind of stocks.

In this article, we will discuss the Finance Brokerage Education things you’ll get from common and preferred stocks, as well as the risk involved in each.

Common Stocks

Common stocks, as the name suggests, are the most common stocks found in the stock market.  If you own a common stock, you are entitled to have a share in the company’s profits through dividend  and/or capital appreciation & Basic of Forex Trading.  

When you’re a common stock holder, you can be given voting rights.  Typically, the number of the shares you own are directly proportional with the number of votes you have.  Of course, the company’s board of directors can decide whether or not to pay dividends, as well as how much is paid to the investors.

Common stockholders have “preemptive rights” that lets them maintain the same proportion of ownership in the company over a period of time.  If the company wants to circulate another round of stock offering, you can buy as many stocks as you want to keep your ownership comparable.

Common stock has the potential for giving much profit through capital gains.  The return and principal value of stocks fluctuate with the changes that take place in the market.  Shares may be valued more or less than their original costs.

Dividend payments are not guaranteed, though, so you should first consider if you have the risk tolerance for this investment risk.

Preferred Stocks

A preferred stock is generally less volatile than a common stock.  However, it has less potential for profits.

Preferred stockholders in general do not have any voting rights, unlike common shareholders, but they have greater claims on the company’s assets.  Preferred stocks may also be “callable.” This means that the company can buy shares back from the shareholders at any time for any reason they it wants, although usually at a good price.

Preferred stock shareholders get their dividends before common stock stockholders get theirs.  Usually, payment to preferred stock holders is higher. If you’re a preferred stock holder, you’ll receive fixed, regular dividend payments for a specified period of time, unlike the varying dividend payments sometimes given to common stock holders.

It is important to keep in mind that fixed dividends depend on the company’s ability to pay as promised.  In the event that the company declares bankruptcy, preferred stockholders get paid before common stockholders.  

On the flip side, however, common stocks have the potential to return higher yields over time through capital growth.  Remember that investments that give higher rewards usually involve a higher amount of risks.

 

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