What Is the Difference Between Common & Preferred Stock?

Now that you're starting to earn some decent money for the first time in your life, you may be looking for other places to put it besides under your mattress or inside a guitar case. If you're willing to take some risk with your extra cash, one option is to invest in the stock market. You can choose from two types of stocks, namely common and preferred.

Identification

When you purchase either common or preferred stock, you actually become an owner of the corporation. You purchase the stocks in the form of shares, with each share being worth a specified dollar value. The share price fluctuates as economic and business conditions change, meaning that your investment value will also fluctuate. With both types of stock, you may also earn dividends, which are a distribution of earnings that are paid to shareholders, typically on a quarterly basis.

Voting Rights

One difference between common and preferred stock lies in the voting rights. If you like to "stand up and be counted," you'll have your chance as a common stock shareholder. You'll have the right to vote for the company's board of directors, typically in the form of one vote per share that you own. Owners of preferred stock usually don’t have voting privileges.

Receiving Assets

In times of economic strife or if a company's management runs the business into the ground or skips off to South America with the profits, the firm may be forced into bankruptcy. If you own common stock, the bad news is that you're the last in line to receive assets. If you own preferred stock, you're a little farther up the totem pole, meaning that you have a better chance of recovering your investment dollars.

Dividends

Preferred stock owners are also the first to receive dividends and may even be issued a fixed quarterly dividend payment. On the other hand, common stock owners receive no such guarantee. In fact, situations can occur when only the preferred owners receive dividends, while the common stock owners are left holding a possibly empty bag. The fixed-dividend feature can also mean that share prices of preferred stock may be more stable than common stock.

About the Author

Chris Joseph writes for newspapers and online publications, covering business, technology, health, fitness and sports. He holds a Bachelor of Science in marketing from York College of Pennsylvania.

Photo Credits

  • Jupiterimages/Goodshoot/Getty Images