What's the Difference Between Preferred Stock Vs. Common Stock?
Wondering which stock to pick from a single company? Here's what happens in a typical battle between preferred stock vs. common stock...
If you're just beginning to invest in the stock market, chances are high that you have seen ticker symbols for Google (GOOG) or Apple (AAPL). You might also have heard some talk about preferred stock or common stock from smaller companies—and wondered what the difference really is.
Each stock type has its own differences and it's not just a matter of price. Truth be told, there are perks and pitfalls to both types and people throughout the investment scene have their own reasons for enjoying each.
Wondering which stock is better? We did too. That's why we're going to take a look at one of the biggest battles on Wall Street today: the battle of preferred stock vs. common stock.
What is Common Stock? What is Preferred Stock?
Before we can talk about the battle between preferred stock vs. common stock, we need to get on the same page about what each term means. Both preferred and common stocks are shares of businesses that are sold on stock markets like the NYSE. This doesn't change.
Most people buy and share common stock. Common stock allows you to vote in company affairs, may pay dividends of fluctuating amounts, and has a tendency to fluctuate quite a bit. If a company goes under, you might lose all your money.
Preferred stock is more like a blend between a regular stock item and a bond. Unlike common stocks, preferred stocks offer guaranteed dividends. If the company dies, you also get advanced time to take stocks out so you can salvage some of your money. Bonds, however, can't be sold at any time without a penalty.
So, what's the difference between these two? Which is better? It depends on what you're looking for...
Preferred Stock Vs. Common Stock: Price
Let's start off with one of the most obvious differences between both types: the pricing. Preferred stock is a lot more stable than common stock, and often has a higher price due to its increased stability.
If you don't like too much volatility, then preferred stock is a good choice. However, if you're an investor looking to profit via volatility or stock market rises, common stock makes more sense.
Preferred Stock Vs. Common Stock: Income
Each type of stock tends to have its own unique trading style involved with its purchase. Common stock can be used for day trading, long-term investment, or as an element in your own unique fund. This is a good choice for people who love the potential to make higher profits, faster. Common stock is considered to be volatile income.
Preferred stock, believe it or not, is considered to be fixed income because of its guaranteed dividend payouts. Preferred stock also doesn't fluctuate as much as common stock does, which is great news for apprehensive investors. Simply put, this is a more stable choice. So while stock may not dip as quickly, it also won't rise as quickly.
Both common stock and preferred stocks can offer dividends. However, preferred stock tends to have higher dividend yields—and they're guaranteed.
Preferred Stock Vs. Common Stock: Voting Rights
Truth be told, this is one of the arenas that will not really count for much of anything for most investors—unless they are really big in the Wall Street game and own a lot of stock in a particular company. With common stock, shareholders can vote on company's actions.
If you like having a little bit of control over what a corporation does, common stock definitely has its perks. However, to actually have a very serious impact, you would need to own a significant share of the stocks in a single company.
Preferred stock will pay more dividends and give you a lot more stability, but it comes with a catch. Preferred stock owners do not get the option to vote in company meetings.
Preferred Stock Vs. Common Stock: Callable Shares
Calling shares is something that can throw a wrench in just about every investor's plans. When a share is deemed "callable," the company that issued out the shares can buy it back at any given time, at a given price, for any given reason.
The callable price is usually listed as a percentage, like 7 percent callable stock. This means that if Company A issues out 7 percent callable stock at $100, they can buy it back for $107, plus any interest that's accrued on it.
Most common stock is not callable unless it's literally Callable Common Stock. It will be disclosed at the time of purchase, and from what we've seen, it's a relatively rare find.
Preferred stocks are much more likely to be callable. Since companies won't want to pay much higher dividends, they may buy back stocks and pay the percentage rather than pay a dividend that's higher.
Call risk is a real issue that you need to be aware of with preferred stock.
Preferred Stock Vs. Common Stock: Risk
Risk is an issue that needs to be addressed, no matter how you want to invest. Whether you're using one of the best apps to manage your stock, or literally calling up a broker, risk is something that's going to need to be addressed.
The good news is that it's pretty clear what to expect from common and preferred stock. Common stock is far more volatile and therefore risker than preferred stock. Preferred stock is seen as a low-risk investment for your money.
It's safe enough to be considered fixed income. That says volumes, doesn't it?
Preferred Stock Vs. Common Stock: Variety
If you want to invest in stocks from all your favorite companies, there's a good chance that you may have a lot of common stocks regardless of what you prefer to do. (See what I did there?)
It shouldn't be too shocking to hear, but preferred stock is way less common than something called "common stock." So, to a point, the stocks do live up to their name.
Preferred Stock Vs. Common Stock: Bankruptcy
As scary as it is to think, let's talk about what happens if you end up investing in a company that goes bankrupt. In a bankruptcy, companies end up liquidating their assets—and that means that people start selling off the stock in droves.
With common stock, you will be last in line to get your money back. Preferred shareholders get preemptive rights, so they have a better chance at having the company buy back stock and recovering whatever money they may have lost.
Preferred Stock Vs. Common Stock: Comparison to Bonds
Common stock and bonds are about as different as night and day. This is good if you like high risk and the opportunity to pursue higher rewards. Most people enjoy this volatility and the ROI it can give. Bonds are low-risk, but lower rewards as well.
Preferred stockholders are those who want a stock that acts like a bond. The stock's low-risk level, plus regular dividend payouts make it act more like a bond than any common stock will.
It's food for thought.
So, who wins?
Truthfully, there's no "clear winner" here. Each stock type has its own perks and pitfalls which makes it an attractive investment. To figure out which stock is right for you, do your research and be honest about your investment style. The answer will come to you in time.