Common vs. Preferred. Stock, that is..
In brief, preferred stockholders get dividends but can’t vote. Common stockholders can vote but don’t get dividends.
Common stock is the most typical type of stock; when people refer to investing and trading stocks, they are usually talking about common stock. Common stock represents ownership in a company; each share gives the owner one vote on anything put to vote in the annual meeting, including electing the board of directors. Dividends (a fixed stream of income) may be paid to common stock owners, but are never guaranteed and depend on if the company is doing well in the market. Common stockholders have a residual claim, meaning they are last in line to receive assets and income of the corporation. But they do have limited liability, meaning they can’t lose any more than their original investment if the company were to fail or go bankrupt.
Preferred stock is also ownership in a company, but doesn’t have the same voting rights (you can’t elect the board, for example). Preferred stock is typically a more stable investment – it promises to pay a fixed stream of income each year in the form of a dividend and is not subject to market fluctuations. Dividends are always paid to preferred stockholders before anything is paid to common stockholders (because of that residual claim to common stockholders as aforementioned). Preferred stock is callable, meaning that if the company decides it wants to buy back the stock, it has the right to do so at any point.
Many companies do not issue preferred stock because it’s expensive to do so. Thus, companies may prefer to issue a bond (which pays out interest in pre-tax profits) than preferred stock (which pays out dividends in post-tax profits). Preferred stock is not usually held by individuals (you or me). Instead, it is held by other corporations because they receive a “dividend received” tax deduction of up to 80% of preferred dividend income. Individuals are not eligible for such a tax break.
Though preferred stock is a more stable investment, common stock yields higher returns in the long-term. No risk, no reward I suppose.
