Investors who buy shares in businesses have two options from which to choose. Those two options are common shares and preferred shares. Both types of shares give you a partial ownership interest in the investment entity, but they do so in different ways. Both investments could be profitable when the enterprise in which you invested does well and its share values grow, but they could inflict a loss upon your investment portfolio if the entity performs poorly and its share values drop.
It is important to know the differences and the respective advantages of common stock vs preferred stock so that you can make the best investment decision for your portfolio. Let’s take a closer look at each so as to better understand them.
Common Shares Give You Voting Rights
If you want to have a say in who serves on the board of directors or possibly run for a board position, you need common shares to do so. Only common shares give shareholders the right to vote with each share having an equal vote. If you own the majority of common shares, you could exercise full control of a company’s operations.
Another important advantage of common stock vs preferred stock is the ability to win elections to the investment entity’s board of directors. After all, if you have the most common shares, you have a majority of the votes. The ability to vote and serve on the board of directors makes common shares more viable for those who want to have a say in things. In many cases, board members own preferred shares as well as common shares so that they can vote and remain on the board of directors.
Owning preferred stock does not provide shareholders with the ability to vote for board members or in other matters. So you would have less control over the investment and who runs it. Yet, preferred shares do have a couple of advantages for their owners. Let’s take a closer look at them.
Preferred Shares Earn Dividends First
Another significant difference in common stock vs preferred stock is that preferred stockholders get paid ahead of common shareholders. A preferred share is similar to a bond and includes guaranteed dividends paid for as long as the shareholder owns the preferred stock. The more preferred shares, the more dividend income that goes to the preferred stockholder.
You can purchase preferred shares in the same way that you buy common shares, which are directly from the company and through either a financial advisor or a stockbroker. The dividend element makes preferred shares more viable for those who want to earn investment income right away. Yet, common shareholders could earn dividends on their investments, too.
Common shareholders do not obtain guaranteed dividends like preferred shareholders, but they might obtain them. The board of directors can determine when to pay dividends to common shareholders, but many companies do not pay cash dividends to owners of common shares.
Common Shareholders Have Last Claim on Assets
If a company is dissolved and its assets are disbursed, common shareholders are the last to receive any of those assets. Creditors and attorneys are always the first to get paid when company assets are sold. Next comes the bondholders who have notes against the company.
The owners of preferred stock follow the bondholders and are the first shareholders to get paid when assets are sold. After the preferred shareholders are paid, then the owners of common stock get what is left of the company’s assets. If the value of those assets outweighs the investment made, then the shareholder realizes an investment profit.
The significant differences in common stock vs preferred stock make it important to research both while considering investing in a particular entity. You should research dividend payments and share values over time before making your final decision.