When most people think about stocks, they usually think about common stocks. But there is another type of stock that is becoming increasingly popular – preferred stocks. So what are the differences between common and preferred stocks? In this blog post, we will discuss the benefits and drawbacks of each type of stock. We will also explain what common and preferred dividends are, and why they matter.

Common stocks are the most common type of stock. They are what most people think of when they hear the word “stock.” Common stocks represent a share in the ownership of a company. In order to receive dividends, common shareholders must be paid out before preferred shareholders. This is why common stocks have a higher risk – there is no guarantee that common shareholders will receive their dividends.

Preferred stocks are less common than common stock, and they come in many different forms. Some preferred stocks are convertible into common stocks, while others cannot be converted at all. In addition to common and preferred stock dividends, there is another type called “participating” (or “premium”) dividends. These can occur if a company has issued more than one class of common or preferred share that differs materially from the other classes of shares held by investors (for example: if an investor holds both common stock and bonds).

The common stock dividend is the most common form of dividend. Common shareholders are paid out before preferred shareholders but after any other class of share that might be held by an investor (for example: if an investor holds both common stock and bonds). The common shareholder receives their dividend on a pro-rata basis – meaning they get everything or nothing, depending on what percentage they own in the company’s ownership structure. A common shareholder may also receive dividends from participating shares if those shares have chosen to participate in such distributions from earnings; however these types of dividends typically only last for as long as there remains money available within the firm’s earnings account.

Preferred stocks, on the other hand, typically have a fixed dividend that is paid out before common dividends. Preferred shareholders are generally not entitled to receive participating dividends (although there are some exceptions). In order to receive their preferred dividends, preferred shareholders must be paid out before common shareholders and any other class of share that might be held by an investor. This means that preferred stocks have a lower risk than common stocks.

Benefits of owning common stocks

• Dividends: Owners of common stock are typically paid out first in terms of dividends. This means they have a higher potential for income from their investment.
• Capital gains: If the company does well and its stock price increases, common shareholders will benefit from the increase.
• Voting rights: common shareholders typically have voting rights, which gives them a say in how the company is run.

Drawbacks to owning common stocks

• Risk: Common stocks are riskier than preferred stocks because there is no guarantee that common shareholders will receive their dividends.
• No guaranteed income: Even if the company does well and its stock price increases, common shareholders may not see any of the gain. This is because they will be paid out in dividends before capital gains are distributed.
• Dilution: If the company issues more shares, common shareholders’ ownership percentages will decrease. This can lead to less control over the company and reduced profits.

Benefits of owning preferred stocks

• Fixed dividend & higher yield: Preferred stock holders typically receive a fixed dividend that is paid out before common dividends. This means they have a higher chance of receiving their desired income from the investment.
• Higher priority in terms of payments: In the event that the company goes bankrupt, preferred shareholders will be paid out before common shareholders and any other class of share that might be held by an investor. Also have a look at the stocks that pays monthly.
• Voting rights: While not all preferred shares come with voting rights, those that do give investors more say in how the company is run.

Drawbacks to owning preferred stocks

• No capital gains potential: As mentioned earlier, preferred stockholders do not typically receive capital gains from their investment,
• Dilution: If the company issues more shares, common shareholders’ ownership percentages will decrease. This can lead to less control over the company and reduced profits.
• Possible call risk: Some preferred stocks are callable, meaning the issuer may redeem them before they mature at par value (the initial issue price). In this case, investors would lose out on any potential appreciation of their shares if they were called away early.

Conclusion

So which is better – common stocks or preferred stocks? The answer depends on each individual investor’s needs and goals. Common stockholders have the potential to earn more money in dividends, but they are also taking on more risk. Preferred shareholders have less risk and a higher chance of receiving their desired income, but they do not have the same potential for capital gains. It is important to weigh the pros and cons of each before making a decision.

Thanks for reading! I hope this gives you a better understanding of common stocks and preferred stocks and helps you make an informed investment decision. Please feel free to leave any comments or questions below!​​​​​