Difference Between Common Stock and Preferred stock
Stocks are the ownership of a company. Companies issue shares to raise money. When we buy stocks we own the company according to the share we are holding. There are mainly two types of stocks companies usually issue. Preferred stock and common stock. Both are shares of the public company. But Preferred stocks differ from common stocks in many ways.
Common stock is the most popular stocks in the market. Many companies only issue common stocks. When we buy common stock of the company you have the right to vote. You can vote the board of directors of the company. You can also vote in corporate decisions. Voting right is the privilege in common stock.
Another important feature of common stock is that the profits from it are related to the overall performance of the company. There is no fixed interest or dividend in common stock. You can earn a lot of money when the company is making a huge profit. But you also have to lose money when the company does not do well.
There is a tragic face of common stock. You will be the last person considered when the company collapse if you are a common stockholder. Lenders, suppliers, debt holders, and preferred stock owners are all ahead of shares of common stock when it comes to getting back any of their money.
Preferred stock is more like bond and less volatile than common stock. Dividends from preferred stock are pre-determined.
The preferred stock yields more dividend regularly than common stock. The dividend is fixed here. You will get the same fixed dividend irrespective of whether the company do well or bad.
A company has to pay dividends to its preferred stockholders before it pays any dividend to its common stockholders. When a company fails, and its assets are liquidated, preferred stocks get preference than common stocks.
Preferred stocks have no voting right as common stocks. This is one of the disadvantages of preferred stock.
Companies can also issue convertible preferred stock. It gives shareholders the right to convert preferred shares into common share under certain circumstances.