Preferred Stocks vs. Common Stocks: Understanding the Key Differences and Investment Benefits

The company rewards its valuable employees in the form of company stocks. This practice is done by both Public Companies and Private Companies where they issue stocks in the form of common stock and preferred stock. Both stocks offer different advantages to the shareholders. Generally, most companies reserve their common stock for employees and preferred stock for investors. Now, let’s understand in detail.

What is Common Stock?

Common Stock represents shares of ownership in a corporation and a claim on profits. Companies generally issue the common stock to the founders and early employees. When an employee owns at least one common stock of the company then the employee receives the power of voting rights on company policies and the ability to elect the board of directors of the organization.

Usually, the common stock performs well in the long run and gives a good return to its shareholders because the value of the stock appreciates, however keeping in mind that dividend income isn’t guaranteed.

Pros and Cons of Common Stock

Pros

• Potential for high growth
• Highly liquid
• Voting rights

Cons

• Volatility can be normal
• Risk of dropping prices
• May not receive dividends

Now, let’s understand what preferred stock is and what the pros and cons are that make preferred stock different from common stock.

What is Preferred Stock?

Preferred Stock is mainly issued to angel investors, and venture capitalists when they are financing the company initially. Mainly, preferred stocks are issued to raise capital from finance companies. Preferred stockholders enjoy the benefit of higher dividends before it issued to common stockholders. Or suppose the company declares itself bankrupt, preferred stockholders are paid from corporate assets before holders of common stock.

Also, Preferred stockholders have a callability feature, much like bonds, that grants the issuer the right to buy back the shares from the market after a specified period.

Pros and Cons of Preferred Stock

Pros

• Usually pays a set dividend
• Volatility can be low
• Offers income and some growth potential

Cons

• Can be called away by issuers
• No voting rights
• If interest rates rise, price falls

Now the question arises what are the key differences between Preferred Stock and Common Stock?

So, after understanding the basic meaning, pros and cons, and the key differences between Preferred Stock Vs common Stock. Now you will be thinking about which stock you should invest in preferred or common stock.

The Judgement

Preferred stock offers fixed dividends and priority in liquidation, which makes it less risky but with limited monetary growth and no voting rights. It is ideal for investors who are seeking a steady income. On the other hand, Common stock has higher growth potential but comes with high risk, as dividends are not guaranteed, and shareholders are last in liquidation. It suits those looking for long-term gains. So, the choice is completely yours whether you are looking for short-term and limited growth or long-term and high growth choose wisely.

Create a Culture People Want to Stick to

• Give ESOPs within a few clicks
• Personalized templates
• Build a community
• Dashboard views

Get a demo