Common stock and preferred stock offer different ownership rights, dividend priorities, and growth potential. While common shareholders typically have voting rights and greater exposure to share-price growth, preferred shareholders generally receive dividend priority and have a higher claim on company assets in the event of liquidation.
This article compares common and preferred stock across dividends, voting rights, growth potential, and risks to help investors understand their key differences.
Key Takeaways
- Common stock represents ordinary ownership and usually comes with voting rights and greater potential for capital growth.
- Preferred stock receives priority for dividends and has a higher claim on assets than common stock.
- Common-stock dividends are less predictable, while preferred shares often provide fixed or more predictable dividends.
- Preferred stock usually has limited voting rights, whereas common shareholders typically have voting rights.
- Neither type is automatically better. The right choice depends on whether you prioritize growth, income, voting rights, risk, and your overall investment strategy.
What is Common Stock?
Common stock is the most widely issued form of ownership by companies; if you purchase common shares, you will become a partial owner of the company.
A major benefit of common stock is that it gives shareholders the right to vote. When it comes to a particular company and the kind of shares held, common shareholders have the opportunity to vote on significant issues, for example, the election of members of the board of directors.
Common shareholders can also gain when the company grows. If the business does well, then the price of its shares may rise, and this could result in investors making a capital gain.
Some companies also make dividend payments to the holders of ordinary shares. Yet these dividends are not guaranteed. Depending on its financial situation and plans, a company may reduce, suspend, or increase the dividend on its ordinary shares.
The disadvantage is that common shareholders are typically the last to be paid when a company distributes the assets that are left after it goes bankrupt or is liquidated.
What is Preferred Stock?
Preferred stock is yet another way of having an interest in a company, but it has features that are rather similar to those of bonds.
When dividends are paid, preferred shareholders usually get them before common shareholders, and they usually have a better claim on the company's assets than common shareholders in the event of liquidation.
Preferred shares usually have a fixed dividend, which makes them an attractive option for investors seeking a regular income.
Preferred shareholders have either limited or no voting rights, and they might also have fewer opportunities for substantial price increases when compared with common stock.
There are several kinds of preferred stock, such as convertible, callable, cumulative, and non-cumulative preferred shares, and the specific rights depend on the terms set out by the company.
Also Read About: Preference Shares
Common Stock vs. Preferred Stock: Key Differences
Common stock usually offers greater potential for capital appreciation.
For example, imagine buying common shares of a small company that later becomes highly successful. If the company's profits and market value grow substantially, the share price could rise significantly.
Preferred stock has less growth potential because its value is more closely connected to its dividend and interest-rate conditions.
That does not mean preferred stock cannot increase in value. It simply tends to behave differently from common stock.
| Feature | Common Stock | Preferred Stock |
| Ownership | Yes | Yes |
| Voting rights | Usually available | Usually limited or unavailable |
| Dividends | Usually variable | Often fixed |
| Dividend priority | Lower | Higher |
| Claim on assets | After preferred shareholders | Before common shareholders |
| Growth potential | Higher | Limited |
| Income predictability | Less predictable | More predictable |
| Risk | Higher | Lower than common stock, but not risk-free |
Which is Better: Common or Preferred Stock?
The answer depends on the goals of each individual because both stocks play different roles in an investor’s portfolio.
The choice of common stock will suit better if:
- You seek potential for growth.
- You are not afraid of changing prices.
- Voting rights are important to you.
- You want more exposure to future growth of the company.
- You have more time for investment.
The choice of preferred stock will be better if:
- You are mainly interested in earnings.
- You seek regular dividends.
- You need more guarantees that you will get dividends and assets in preference to common stockholders.
- You do not mind giving away your voting rights.
- You understand all the conditions of issuance of preferred stocks.
In any case, before purchasing stocks, it is crucial to study the conditions under which these securities are issued.
Conclusion
Common and preferred stock both give investors ownership in a company, but they offer different combinations of risk, income, voting rights, and growth potential. Common stock favors investors seeking long-term growth, while preferred stock can appeal to those who value income and priority over common shareholders.
Before buying either type, look beyond the name and understand the specific rights, dividend terms, risks, and financial health of the company. That is what ultimately matters when deciding whether an investment fits your portfolio.
