• Wealth Management Division

Common vs. Preferred Stocks: What You Need to Know

The two primary forms of equities offered by companies and exchanged among investors on the open market are common stocks and preferred stocks. Each class of stock provides shareholders a portion of the firm represented by the stock. Despite certain similarities, there are also important distinctions between common stock and preferred stock, including the risk of ownership. Before owning any sort of stock, it is critical to understand its strengths and limitations.


Common Stock

The most common class of stock issued by corporations is common stock. It entitles shareholders to a portion of the company's income in the form of dividends or capital appreciation. Common stockholders often have voting rights, with the number of votes directly proportional to the number of shares owned. Of course, the company's board of directors has the authority to decide whether or not to pay dividends and how much to pay. The size of a company's dividend can change in tandem with earnings, which are impacted by economic, market, and political developments. Dividends are usually not guaranteed and can be amended or canceled at any time.


Owners of common stock have "preemptive rights" to keep the same share of the company's ownership throughout time. If the firm issues another round of shares, shareholders can buy as much as they need to maintain their ownership equivalent.


Profits from capital gains are possible with common stock. Stock returns and primary values fluctuate in response to changes in market circumstances. When shares are sold, they may be worth more or less than their initial purchase price. Dividend payments are not guaranteed to shareholders. Before investing in common stock, investors should examine their investment risk tolerance.


Preferred Stock

Preferred stock is less volatile than regular stock, although it often has less profit potential. Preferred shareholders, unlike regular shareholders, do not have voting rights, but they do have a higher claim to the company's assets. Preferred stock can also be "callable," which implies that the firm can buy back shares from shareholders at any time for any reason, generally at a discount.


Preferred owners get their dividends before regular shareholders, and these payouts are often greater. In contrast to the variable dividend payments often granted to ordinary shareholders, preferred stockholders get fixed, recurring dividend payments for a certain length of time. Of course, it's vital to keep in mind that fixed dividends are contingent on the company's ability to pay them on time. Preferred investors are compensated before common stockholders in the case of a company's insolvency. However, unlike preferred stocks, common stocks have the potential to generate higher returns through capital growth over time. Investments that seek higher rates of return also carry a higher level of risk.


REMEMBER - both common stock and preferred stock have their advantages. When considering which type may be suitable for you, it is important to assess your financial situation, time frame, and investment goals.



Would you like to consult with a financial advisor about common and preferred stocks?


 

The material on this page reflects PG Capital's professional opinions as of today and is subject to change. The information presented here has not taken into account any particular investor's investment goals or needs, and investors should not base their investment decisions entirely on this material. Past performance is not a guarantee of future results. All investments involve some amount of risk, and investors have different time horizons, goals, and risk tolerances, so consult with your PG Capital Financial Advisor before proceeding.

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