Common stock and preferred stock are two main types of equity that a company can issue. They each come with different rights and privileges.
Common Stock:
This type of stock represents an ownership stake in a company and usually comes with voting rights, enabling stockholders to have a say in corporate matters such as electing the board of directors or voting on major corporate policies. However, common stockholders are last in line to receive any remaining assets if the company goes bankrupt and is liquidated, after creditors, bondholders, and preferred stockholders.
Common stockholders may receive dividends, which are a portion of the company's earnings distributed to shareholders. However, the company's board of directors decides whether to distribute dividends, and common stock dividends can fluctuate depending on the company's performance.
Preferred Stock:
Preferred stock also represents an ownership stake in a company, but it comes with a higher claim on the company's earnings and assets than common stock. This means that preferred stockholders have a higher priority to receive dividends and are paid out before common stockholders in the event of a liquidation.
However, preferred stockholders typically do not have voting rights, or their voting rights are limited. The dividends for preferred stock are usually set at a fixed rate, which can provide a more predictable income stream. Some preferred stocks are also "convertible," meaning they can be converted into common stock under certain conditions.
Overall, the choice between investing in common or preferred stock depends on an investor's financial goals, risk tolerance, and desire for voting rights or dividend income. A well-diversified portfolio may include a mix of both types of stock.
