Common Stock vs. Preferred Stock: What Are the Differences?
There are a number of differences when it comes to common stock vs. preferred stock. Some of these include:
- Voting Rights. Preferred stock typically does not offer voting rights.
- Preferred Stock Dividends. Preferred stock offers a dividend yield of a set dollar amount of a dividend that is divided by the price of the stock.
- No Dividends. Common stock often pays no dividends or pays variable dividends.
- Valuation. Preferred stock value is inversely related to interest rates while common stock value is related to supply and demand.
- Higher Claim. Preferred stock has a higher claim to assets and earnings in a liquidation.
- Higher Dividends. Preferred stock usually receives higher dividends than common stocks.
- Priority. Preferred stock has priority If dividend payments are missed and need to be repaid.
- Callability. Preferred stock offers callability for the issuer.
- Claim on Profit. Common stock comes with a claim on profits and voting rights.
- Long Term Gains. Common stock tends to perform and provide the biggest potential for long-term gains compared to preferred or bonds.
These differences are the reason that some opt for preferred stock over common stock when given the option. However, not all companies issue preferred stock or allow their shareholders the option of choosing between the two types of stock.
Both types of stock differ from a convertible note, which is a type of debt where the purchaser can sell the stock either back to the company or to another individual/company at any time.
Here is an article about the differences between common stock and preferred stock.
What is Common Stock?
Common stock is a share of equity ownership in a particular corporation. This stock is the type that most people choose to invest in. When an individual refers to owning, buying, or selling stocks they are generally speaking about common stock.
This is the predominant way that stocks are issued. For most people it is the only form of stock that they will be eligible to purchase.
The purchase of common stocks, with a stockholders agreement or SAFE agreement includes a claim on profits as well as affording voting rights toward electing board members for the corporation. Through this election process common stockholders are granted some rights toward corporate decisions.
Those who hold common stock may or may not receive dividends on their shares. If they do receive dividends they are based on the discretion of the board of directors and are issued only after preferred stockholders have gotten their share of profits.
Here is an article about what common stock is.
What is Preferred Stock?
Preferred stock is a share in a company that then offers stockholders fixed dividends. These fixed dividends are one of the primary reasons that many people opt for this stock when given the choice in a stock purchase agreement. The dividends for this type of stock are issued before dividends for common stockholders.
This stock type is not available for all companies and is offered in smaller quantities. It offers priority over common stock in regards to payments from the company. The shareholders agreement will specify the exact rights and responsibilities. It will also include information about fiduciary duty.
Preferred stockholders do not have voting rights and have no ability or say in regards to policy decisions, board elections, or other company decisions in the way that common stockholders do. However, the advantages of dividends and priority are often enough for potential investors.
Here is an article about what preferred stock is.
Examples of Preferred Stock
There are many preferred stocks currently in the market, however some of these include:
- Arlington Asset 7.00% Series B Cumulative Preferred Stock
- Ashford Hospitality Trust Inc. 8.45% Series D Cumulative Preferred Stock
- Hartford Financial Services ADRs of 6.000% Non-Cumulative Preferred Series G
- Annaly Capital 6.95% Series F Fixed-to-Floating Rate Cumulative Preferred
- Regions Financial ADRs of 5.700% Fixed-to-Floating Rate Non-Cumulative Preferred Series C
- Skylight Health Group Inc. 9.25% Series A Cumulative Redeemable Perpetual Preferred
- S. Bancorp ADRs of 5.5% Series K Non-Cumulative Preferred Stock
- Wintrust Financial Fixed-to-Floating Rate Non-Cumulative Preferred Series D
- Brookfield Property Partners L.P. 6.375% Class A Cumulative Preferred Units, Series 2
- Pacific Gas & Electric Co. 5% 1 st Preferred Stock
These are only a small sampling of the many preferred stocks that are currently available. In total, there are 575 registered preferred stocks currently available on the U.S. stock market. These stocks offer differing percentage returns and liquidation values as with common stocks.
These preferred stocks also offer dividend payouts and priority in the event of a bankruptcy over what is available for common stockholders. In general, these types of stocks are considered less of a risk than common stock because shareholders receive payouts on a regular schedule and have a claim to any money that is available if the company goes entirely bankrupt.
Here is an article with some examples of preferred stock.
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How Stock Classes Work
Stock classes, or share classes, are specific designations that are given to securities for a company. These designations can be applied to common stocks, preferred stocks, and mutual fund units as well. Typically, they are applied as alphabetic markers.
Stocks may be designated as Class A or Class B, offering different rights and/or privileges along with the classification.
These stocks are classified based on the type of rights that are offered to the shareholder. As an example, a private company that is in the process of going public decides to offer two different classifications of stock. One offers increased voting rights over the other. This creates two different tiers or power structures.
Classes can be used for public companies (those that are already offering stocks) and for private companies (those that are about to go public for the first time). They can also be used for mutual fund shares and others.
The company gets to decide which type of stocks they are going to offer and whether they are going to offer different classifications in the process or only a single classification. Not all companies choose to have class A and B stocks, for example.
Here is an article about classes for stocks and some of the different options.
Is Preferred Stock Safer Than Common Stock?
The short answer is that preferred stock is often safer than common stock, offering a bit more security but there are still risks involved. A preferred stock offers higher priority, which is where the protection comes in. They are the first to get:
- Dividend payments
- Liquidation payouts
- Value increases or decreases based on interest rates
These aspects of preferred stock make it safer than common stock because the payouts come earlier. Those who have common stock may not get dividend payments at all, or if they do those payments are variable, lower, and come after preferred stockholders have gotten theirs.
On the other hand, preferred stock is not as safe as bonds. With bonds, there is a stronger guarantee regarding payouts for dividends, repurchase, and liquidation. Bond holders will always get their money first but as a result they get lower interest.
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