Common stock and preferred stock

Introduction

Definition of common stock and preferred stock

Stock refers to ownership or equity in a firm. There are two types of equity -
common stock and preferred stock

Common stock is the most common type of stock that is issued by companies. It
entitles shareholders to share in the company’s profits through dividends and/or
capital appreciation. Common stockholders are usually given voting rights, with
the number of votes directly related to the number of shares owned. Of course, the
company’s board of directors can decide whether or not to pay dividends, as well
as how much is paid.

Common stock represents shares of ownership in a corporation and the type of

stock in which most people invest. When people talk about stocks they are usually
referring to common stock. In fact, the great majority of stock is issued is in this
form. Common shares represent a claim on profits (dividends) and confer voting
rights. Investors most often get one vote per share-owned to elect board members
who oversee the major decisions made by management. Stockholders thus have the
ability to exercise control over corporate policy and management issues compared
to preferred shareholders.

Preferred stock is an equity security that has the properties of both an equity and
debt instrument and is higher ranking than common stock.

Preferred stock is a type of capital stock issued by some corporations. Preferred

stock is also known as preference stock.

The word "preferred" refers to the dividends paid by the corporation. Each year,
the holders of the preferred stock are to receive their dividends before the common
stockholders are to receive any dividend. In exchange for this preferential
treatment for dividends, the preferred stockholders (or shareholders) generally will
never receive more than the stated dividend.

Preferred shares are more common in private or pre-public companies, where it is

useful to distinguish between the control of and the economic interest in the
company. Government regulations and the rules of stock exchanges may either
encourage or discourage the issuance of publicly traded preferred shares.

Similarities and difference between common stock and preferred stock

Similarities

 Both types of stock can have a claim to income in the form of capital
appreciation as well
 Both types of stock represent a piece of ownership in a company
 Each type gives stockholders a partial ownership in the company
represented by the stock
 Both are tools investors can use to try to profit from the future
successes of the business.

The Difference between those stocks

There are many differences between preferred and common stock. The main
difference is that preferred stock usually do not give shareholders voting rights,
while common stock does, usually at one vote per share owned.

The major difference:

 The main difference between preferred and common stock is that preferred
stock gives no voting rights to shareholders while common stock does.
 Preferred shareholders have priority over a company's income, meaning they
are paid dividends before common shareholders.
 Common stockholders are last in line when it comes to company assets,
which means they will be paid out after creditors, bondholders, and preferred
shareholders.
 The main difference is that common stockholders don’t receive the dividend
until the preferred stockholders receive it.
 Common stockholders don’t receive the dividend as per a pre-determined
rate. Preferred stockholders receive the dividend as per a pre-determined
rate.
 Common stockholders grow with the company. That means the growth
potential of common stockholders is huge. The growth potential of the
preferred stockholders, on the other hand, is fixed.
 Common stockholders have voting rights and they can vote on the important
issues of the company. Preference stockholders don’t have any voting rights.
  After liquidation, the preferred stockholders are paid before the common
stockholders.
 If the common stockholders aren’t paid in a year, the arrears don’t accrue in
the next year. In the case of preferred shareholders, the arrears accrue and
the company has to pay the arrears in the next year.
 If the company makes profits, common stockholders receive dividends. If a
company incurs losses, they don’t receive any dividend. But in the case of
preferred stockholders, they receive money whether the company makes
profits or incurs losses.

The rights of the common stockholders

 Voting rights: They can offer their important votes on issues the
business has been facing or struggling with. This is an important right
because preferred shareholders are not given the right to vote even
after receiving the dividend before common stockholders.
 Right to receive dividends: Have the right to receive dividends if the
company makes profits.
 Right to sell off the stocks for profits: The common stockholders
who are also called equity shareholders can sell off their stocks to
someone else at a higher price.
 Right to receive the remaining cash after liquidation: If a business
decides to liquidate, equity shareholders have the right to receive cash
depending on their ownership of shares.

The Rights of Preferred Stockholders

 Right to own the company: Preferred stockholders also have the

right to own the company by purchasing the preferred stocks through
brokers.
 Right to get preferred treatment for dividend pay-out: The most
significant advantage of preferred stockholders is to get the dividend
even before the common stockholders
 Right to get a fixed dividend: When the preference shares are issued,
preferred stockholders get a fixed rate of dividend.
 Right to get preferred treatment after liquidation: Even when the
business liquidates, the preferred stockholders are given preference in
paying out the dividend first.