Stocks represent ownership in a company, but not all stocks provide the same rights and benefits. The two most common categories are common stock and preferred stock. Understanding how they differ helps investors choose securities that match their financial goals and risk tolerance.
This guide explains both stock types in clear terms, focusing on ownership rights, income potential, and risk.
What Is Common Stock
Common stock is the most widely issued and traded form of equity. When people refer to owning shares in a company, they are usually talking about common stock.
Common shareholders benefit most directly from a company’s long-term growth, but they also face greater uncertainty.
Key Characteristics Of Common Stock
Common stock comes with several defining features that shape the investor experience.
- Ownership stake in the company
- Voting rights on major corporate decisions
- Dividends that may change or be suspended
- Higher potential for capital appreciation
Dividends on common stock are not guaranteed. Companies typically pay them only when profits and cash flow allow.
Risks And Rewards Of Common Stock
Common stock tends to be more volatile than preferred stock. Share prices can rise significantly during strong business performance but can also fall sharply during downturns.
In the event of liquidation, common shareholders are paid after creditors and preferred shareholders, making this stock type riskier in worst-case scenarios.
What Is Preferred Stock
Preferred stock is a hybrid security that combines features of both stocks and bonds. It is designed to provide more stable income with less exposure to price swings.
Preferred shareholders usually do not participate heavily in company growth, but they gain priority in income and asset claims.
Key Characteristics Of Preferred Stock
Preferred stock offers predictable benefits that appeal to income-focused investors.
- Fixed or predictable dividend payments
- Priority over common stock for dividends
- Higher claim on assets during liquidation
- Limited or no voting rights
Dividends on preferred stock are often paid at a fixed rate, making them easier to forecast compared to common stock dividends.
Risks And Rewards Of Preferred Stock
Preferred stock generally carries lower risk than common stock but higher risk than bonds. Prices tend to fluctuate less, but upside potential is limited.
Interest rate changes can affect preferred stock values, as investors often compare them to income-producing bonds.
Common Stock Vs Preferred Stock
Both stock types serve different investment purposes. The choice depends on whether an investor values growth, income, or stability.
Key Differences In Ownership And Income
The most noticeable differences relate to control, dividends, and risk exposure.
- Common stockholders usually have voting rights
- Preferred stockholders receive dividends first
- Common stock offers higher growth potential
- Preferred stock provides more stable income
These differences make common stock more suitable for long-term growth strategies, while preferred stock aligns with income-focused portfolios.
Treatment During Company Liquidation
If a company shuts down, the order of payment becomes critical.
Preferred shareholders are paid before common shareholders, though both are paid after creditors. This priority gives preferred stock a safety advantage in adverse situations.
Which Stock Type Is Right For You
Choosing between common and preferred stock depends on financial objectives and comfort with risk. Investors seeking long-term appreciation and influence in company decisions often favor common stock.
Those prioritizing steady income and reduced volatility may prefer preferred stock. Many diversified portfolios include both to balance growth and income.