Comparing Common Stock and Preferred Stock: Pointing Out the Differences

Common stock and preferred stock have important differences. This article goes into compare common stock and preferred stock How are they different?

I/ What are common stocks and preferred stocks?

Stocks are an important part of stock investing, with different types offering different benefits and risks to investors. In this article, we will compare two popular types of stocks: Preferred stock and common stock. 

1. What is common stock?

Common stock is the most common type of stock issued by companies. When you own common stock, you become a shareholder and have the right to participate in shareholder meetings.

Shareholders have the right to vote at company meetings, including important decisions such as board elections and changes to company policy. Shareholders often receive dividends, although the amount of dividends is not guaranteed and can vary depending on the company's performance.

2. What is preferred stock? 

Preferred stock is a type of stock that gives investors some special benefits compared to common stock. Preferred stock is often issued with preferential terms to attract investors.

Preferred stockholders receive dividends at a fixed rate or have priority over common stockholders. These dividends are usually paid first and do not vary with business performance. In the event of bankruptcy and liquidation of the company, preferred stockholders are paid before common stockholders.

II/ Comparison of common stocks and preferred stocks: 

In this section, HVA Group will go into analysis with you Common stock and preferred stock are different After analyzing the advantages and disadvantages of each type of stock, those who are looking to invest in one of these two types of stocks will be less hesitant and can easily make the final investment decision. 

Here are the 3 most obvious differences when Comparison between common stock and preferred stock:

1. Financial benefits

Dividends: Common stocks have variable dividends that depend on the company's profits. In contrast, preferred stocks usually have a fixed dividend rate and have priority in payment.

Priority for asset liquidation: Preferred shareholders are paid before common shareholders in the event of a liquidation.

2. Voting rights

Common stock: Shareholders have the right to vote at the general meeting of shareholders and participate in important decisions of the company.

Preferred stock: Usually have no voting rights, so investors have no direct influence on company management decisions.

3. Risk and return

Common stock:

• Profit:

Common stocks provide investors with income, but this income is not fixed and can fluctuate significantly based on the performance of the company. If the company performs well and earns high profits, the price of the common stock can increase, and the company may pay dividends to shareholders. During favorable market times, the price of the common stock can increase significantly, providing investors with significant profits. 

• Risk: 

Because of the unpredictable volatility of stock prices and their dependence on business performance, investing in common stocks is riskier than investing in preferred stocks. Investors can benefit from high growth if the company performs well, but they also face the risk of losing some or all of their investment if the company performs poorly.

Risks of investing in share usually comes mainly from two main factors:

Stock price fluctuations: 

Stock prices are often volatile and can fluctuate widely due to a variety of factors, including economic conditions, company performance, political events, and even investor sentiment. When stock prices fall, investors may suffer losses if they have to sell their shares for less than they bought them. This volatility increases the risk of losing capital, especially when investing in the short term or during periods of market volatility.

In difficult years, shareholders will not receive dividends:

Dividends are a portion of a company’s profits that it distributes to its shareholders, but not every year a company can pay dividends. If a company is in financial trouble, has declining profits, or even makes a loss, the company’s management may decide not to pay dividends in order to retain profits for reinvestment or to improve its financial position. This means that in difficult years, investors in common stocks may not receive dividends, reducing the total return from investing in that stock.

Preferred stock:

• Profit: 

When you own preferred stock, you receive a fixed, agreed-upon dividend regardless of how the company performs. This provides stability in your returns, as you can predict how much you will receive in dividends each year.

If a company does not perform well, it can cut or stop paying dividends on common stock, but must still pay dividends on preferred stock (unless the company is in serious financial trouble).

• Risk: 

While preferred stocks offer dividend stability, they lack the ability to grow earnings. Preferred stock dividends do not change over time, even as the company grows and profits increase.

In contrast, common stocks may not pay a fixed dividend, but they have the potential for higher growth. As the company grows, the value of common stocks increases and dividends may be adjusted upward, allowing investors to benefit from this growth. This means that preferred stocks will not benefit from the company's rapid growth, making the overall return on preferred stocks lower over the long term than on common stocks.

III/ Who should buy common stocks and who should buy preferred stocks?

>>> See more articles: Which stocks should new stock investors buy? 

Common stock

• Suitable for investors seeking high returns and able to accept risks.
• Ideal for those who want to be involved in company management decisions and have faith in long-term growth.

Preferred stock:

• Ideal for investors looking for a steady income from dividends and prioritizing asset liquidation.
• Suitable for those who prioritize protecting their investment capital and are not concerned with voting rights in the company.

Hopefully, through the detailed information updated in the article "Comparison of common stock and preferred stock: Point out the difference”, Those who are looking into investing in either of these stocks have already made their final decision. HVA Group believe that Understanding the differences between common and preferred stocks will help investors choose the right type of stock for their financial goals and risk tolerance. Common and preferred stocks each have their own advantages and disadvantages, and choosing the right type of stock can optimize your investment benefits.