COMMON STOCK AND PREFFERD STOCK

INTRODUCTION
Stocks are partial shares in a company. Those who purchase stock own part of the company. The
stockholders, or shareholders, have equity in the company, and through their stock purchases, the
company gains equity capital.

Common stock

Common stock is, you guessed it, the most common type of stock. When most people use the
term “stocks” they are referring to this kind of stock. Common stockholders have voting rights,
meaning that according to how many shares of a particular company they own, they have a
certain amount of say in mergers and board elections. The more shares they own, the more
influence they have on these decisions.

Voting rights give common stockholders some agency over the direction of the company as part
owners. This right is a bit of a trade off because if they were to invest in the same company in
other ways, say, with corporate bonds or preferred stock (which we’ll cover below), they would
be paid out first in the event of the company’s liquidation. There’s a chance that common stock
could lose all of its value in a bankruptcy scenario.

Preferred stock

Most stocks sold in the stock market are common stocks. Although it is much rarer, preferred
stock can be bought and sold in the same way. Potential buyers must be wary of what they are
purchasing because there are differences between common and preferred stock that make them
very different investments.

As opposed to the voting rights and appreciation potential that come with common stock,
preferred stockholders have other benefits. Preferred stock has a fixed dividend policy, meaning
the company makes the same dividend payments each quarter. If the company is doing well,
there’s a chance that dividend payments on common stock will rise above those of preferred
stock. On the other hand, if the company is doing poorly, common stock payments will fall while
preferred stock payments remain the same.

In this way, preferred stocks are much more similar to bonds, however in the case that the
company goes under, bondholders and other debt investors are paid back before preferred
stockholders. They are also perpetual, whereas bonds no longer earn payments from the
company after their maturity dates. Preferred stocks can be sold just like common stock, but
preferred stocks’ value does not fluctuate as much. While there is some volatility depending on
the company’s financial status, they are thought of as a generally low risk/low reward
investments.

Differences between Common and Preferred Stock

The key difference between Common Stock and Preferred Stock is that Common stock
represents the share in the ownership position of the company which gives right to receive the
profit share that is termed as dividend and right to vote and participate in the general meetings of
the company, whereas, Preferred stock is the share which enjoys priority in receiving dividends
as compared to common stock and also preferred stockholders generally do not enjoy voting
rights but their claims are discharged before the claims of common stockholders at the time of
liquidation.

When a business needs more money to invest in their growing business, they can opt for issuing
shares. Issuing shares can be of two types.

When we talk about stocks, it actually means common stock. Through it, shareholders can earn
dividends and can also sell out their stocks when the selling price goes above and beyond their
purchase price. Common shareholders are also given voting rights in corporate challenges or
decision-making processes.

As the name suggests, preference shareholders are given preference over common shareholders.
Though preference shareholders are not given any voting rights, they have opted first for the
dividend pay-out before common shareholders.

Similarities between Common Stock & Preferred Stock

 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.
 Common stock and preferred stock are the two main types of stocks that are sold
by companies and traded among investors on the open market

 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 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.
 ACCOUNTING AND FINANCE

AUDITING
PRINCIPLES AND PRACTICE II

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