Common Stocks vs. Preferred Stocks
Understanding Preferred Stocks
Preferred stock is the term for a hybrid investment vehicle. This is part stock and part debt instrument. Preferred stock can also be called preferred shares. This type of investment is ranked higher than common stock but lower than bonds.
Owners of preferred stock are not allowed to vote like common stock holders but will usually be paid a dividend. They also carry first rights to liquidation proceedings and bankruptcy. Often, preferred stock will have a convertibility feature, allowing the owner to convert into common shares. To find out out preferred shares, read the “Certificate of Designation” to company puts out.
Preferred stocks are similar to bonds as they are rated by a major credit rating agency. Preferred stocks are generally acceptable to a wider range of investor and are thought to be a safer vehicle than common stocks.
Understanding Common Stocks
Common stock is a way for individuals to own a portion of a publicly traded company. It is referred to as “common” to differentiate it from preferred stock. This is significant in case of a bankruptcy, as common stock is paid out last, after preferred stock holders, bondholders and creditors. Common stockholders have voting rights unlike preferred stockholders. There is no set schedule for dividend payment to common stockholders. Common stock can move up and down sharply over time and returns vary greatly. Generally, common stock carries much more risk than preferred stock but returns can be greater if market conditions and the companies performance excel.
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