DIFFERENTIATING BETWEEN PREFERRED STOCK AND COMMON STOCK

In this article, We will be DIFFERENTIATING BETWEEN PREFERRED STOCK AND COMMON STOCK, preferred stock and what differentiate preferred stock from common stock, will be highlighted.

Preferred stock and common stock are differentiated in many ways. The major difference is that preferred stock does not give voting rights to shareholders, while common stock does. Investors are familiar with common stock than preferred stock.

The two types of stock show a piece of ownership in a company and they are tools used by investors to make profit from the future progresses of the business.

KEY POINTS

  • Voting rights that preferred stock does not give to shareholder is the major difference between it and common stock.
  • Preferred stock shareholders are paid dividends before common stockholders.
  • Common stockholders are the last to be considered as far as company assets are concerned, this means that they will only be paid after creditors, bondholders and preferred shareholders have been paid.

PREFERRED STOCK

No voting rights given to preferred shareholder, is the major thing that differentiate it from common stockholders. This indicate that preferred shareholders have no voice in the election of company’s board of directors or any form of corporate policy of the company.

However, it is just like bonds because with preferred shares, investors have fixed dividend forever.

Calculation of the dividend yield of preferred stock is done as the dollar amount of a dividend divided by the price of the stock. And is commonly depend on the par value before the offer. Also calculated as a percentage of the present market price after it starts trading. This is not the same with common stock, with unsteady dividends, stated by the board of directors and not guaranteed. Common stock are not being paid dividend by many companies at all.

Preferred shares, like bonds also have a par value affected by interest rates. Increase in interest rate result in decrease of the value of the preferred stock value and vice versa. But with common stock, the value of shares is controlled by demand and supply of the market partners.

In case of bankruptcy, preferred stockholders have a higher claim to a company’s assets and earnings. Also during the company’s boom, the dividend for preferred stock are higher than that of the common stock. More attention is given to preferred stock than to common stock. If a company misses a dividend payment arrears are paid to preferred shareholder before paying to common shareholders.

Compared to common share, preferreds are subject to being redeemed at the demand of the issuer. Preferred shareholders have opportunity for these shares to be called back at a redemption rate which stand for an important premium over their purchase price.

WHAT DIFFERENTIATE PREFERRED STOCK FROM COMMON STOCK

COMMON STOCK

This shows shares of ownership in a corporation and many investors know about it. Majority of stock is issued in the common stock.

It shows a claim on profits and give voting right to shareholders. So when time comes for a company to elect a board of directors or vote on any form of corporate policy, common stockholders can participate in the election. They have the ability to control the corporate policy and management issues of the company unlike the preferred shareholders.

Common stock achieve a better result than bond and preferred shares. It provides the possibility for long-term gains. In case of progress, the value of a common stock can rise. But if the company does poorly, the stock’s value will reduce.

The common stock that was first issued was by Dutch East India Company in 1602.

Preferred shares have the benefit of being converted to a fixed number of common shares which common don’t have.

In terms of company’s dividends, the board of directors decides whether to pay out a dividend to common stockholders or not. In case a company misses a dividend, the preferred stockholder must be paid any arrears before the common stockholder.

During time of bankruptcy, preferred stockholders have a greater claim to a company’s assets and earning. This indicate that when the company must close and pay all creditors and bondholders, common stockholders will be the last to be paid.

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