Common vs Preferred Stock Differences and Similarities

For decades, companies issue stocks as a means of raising funds to finance various projects such as expansions, purchase of assets, paying off debts, and research and development. Although common stocks are the most commonly issued stocks, preferred stocks are issued too especially by companies who do not want to dilute control since preferred stocks typically do not have voting rights.

Before we delve deeper into the common vs preferred stock differences and similarities, let us have a look at each of these stocks individually, focusing on their features and types as well as the benefits and drawbacks associated with owning either of them.

Common stock can be issued through any of the following means:

1. Initial public offering: Common stock is generally issued through an initial public offering (IPO) which is mostly the first time a private company issues shares to the public, it is commonly referred to as going public for the issuing company. It is also known as a public offer.
2. Offer for sale: Companies usually have a specified number of stocks they can issue which is known as the authorized stock. When a company sells its stocks, they are known as issued stocks. During the initial public offering, not all the stocks issued get sold, this is where the offer for sale comes in. Here, the company offers its already existing stocks for purchase by the public.
3. Stock exchange introduction: Here, the company already has a substantial amount of stockholders but seeks to have its stocks trading in the stock exchange market such that investors seeking to purchase their stocks can easily find relevant information about them as well as make the purchase. In order for this to happen, the company usually has to meet some criteria stipulated by the Securities and Exchange Commission (SEC) before they get listed on the stock exchange through a stock broker.
4. Right or subscription issue: This is when a company offers its existing stockholders the option to buy new stocks that it has issued in order to prevent stock dilution.

Additional ways by which common stocks are issued are through bonus issues, prospectus issues, and placings.

Types

1. Blue chip stocks.
2. Cyclical stocks.
3. Defensive stocks.
4. Growth stocks.
5. Income stocks.
6. Penny stocks.
7. Speculative stocks.

Characteristics

1. Holders of common stock are said to have ownership in the company in which they hold shares, this is because by purchasing the stocks of the company, they have invested in the company. Thereby sharing its ownership with the company founders and other stockholders.
2. The most prominent feature of common stock is that it gives its holders the right to vote on decisions in the company in which they own the shares. The voting right can be used in the election of board members, deciding on company policies, and any other decision of the company that requires voting. A common stock holder typically has one vote for each stock they own, therefore the more stocks they own, the more voting rights they have.
3. Before a company issues common stock, its price must have already been predetermined and specified, this is known as its par value. This is another common characteristic of common stocks.
4. Common stocks generally do not have a maturity date; this is a specified date when the investor gets paid back their initial principal investment alongside all other interests. As a result of this, their holders are entitled to dividends for as long as the issuing company is in existence.
5. When a company goes bankrupt or liquidates, holders of common stocks in the said company have a residual claim on its assets, while still in operation, they have a residual claim on its income. These imply that they get income or assets after the bondholders and preferred stockholders.
6. The liabilities common stockholders have is limited since they only stand the risk of losing their only their initial investment when the company in which they hold the share encounters any challenges.

List of common stocks

1. Amazon.com, Inc.
2. BuzzFeed, Inc.
3. Coca-Cola Co.
4. Dana Inc.
5. Emerging Markets Horizon Corp.
6. Ferrari NV.
7. Goldman Sachs Group Inc.
8. Honeywell International Inc.
9. Intel Corporation.
10. Johnson & Johnson.
11. Kellogg Company.
12. Lucid Group Inc.
13. Meta Platforms, Inc.
14. Netflix Inc.
15. Oracle Corporation.
16. Pfizer, Inc.
17. QUALCOMM Incorporated.
18. Raytheon Technologies Corporation.
19. Starbucks Corporation.
20. TotalEnergies SE
21. United Parcel Service Inc.
22. Verizon Communications Inc.
23. Walmart inc.
24. Xcel Energy Inc.
25. Yellow Corp.
26. Zoetis Inc.

Listed above are some companies that issue common stocks..

Benefits and drawbacks of owning common stock

As it is with any investment vehicle, owning common stocks also has its benefits and drawbacks. Investors seeking to purchase this kind of stock should consider these as it can guide them to make a more informed decision as regards buying common stock.

Benefits

1. Owning common stocks is a source of endless income to its holders, provided that the company that issued it remains in business since it does not have a maturity date.
2. Common shareholders have the right to be offered subsequent shares that the company wants to sell first before they can sell them publicly to the new investors, this is known as a preemptive right.
3. The price of common stock has the tendency of increasing over time, when this happens, its holders can sell all or part of the stocks they own to make a profit out of it which is considered a capital gain.
4. Common stocks can be easily sold whenever the stockholder wishes to sell since they are publicly traded on the stock exchange which means they can be easily converted to cash; this is known as liquidity.
5. Holders of common stock can be part of all decision-making in the issuing company since they have the right to vote on company policies, board member elections, mergers, acquisitions, etc.

Drawbacks

1. Common stockholders are not assured of dividend payments as the issuing company is not obligated to pay them dividends, additionally, some companies specifically issue common stock that has no dividend payments at all. Common stocks that are entitled to dividend payments are known as dividend stocks.
2. When it comes to having a claim on assets at bankruptcy or liquidity of the stocks’ issuing company, holders of common stock only get a portion if there is some remaining after other creditors, bondholders, and preferred stockholders; this means they have a residual claim on assets.

Additionally, unlike common shares, they are less commonly issued and typically have no voting rights. They can also be converted to common stocks and have a cumulative dividend payment.

Types

1. Convertible preferred stock.
2. Cumulative preferred stock.
3. Exchangeable preferred stock.
4. Monthly income preferred stock (MIPS).
5. Noncumulative preferred stock.
6. Nonparticipating preferred stock.
7. Participating preferred stock.
8. Perpetual preferred stock.
9. Preference preferred stock.
10. Prior preferred stock.
11. Putable preferred stock.

Characteristics

1. Preferred stockholders are entitled to a fixed dividend which is usually a percentage of the stock’s par value or a predetermined specific dollar amount. This dividend is generally paid monthly, quarterly, or annually depending on the terms of the stock as specified in its prospectus.
2. In a situation when the issuing company of these stocks liquidates, they have a claim on the company’s assets which is usually higher than that of common stockholders. Additionally, they also get paid dividends ahead of holders of common stocks, hence they are said to have a higher claim on assets and distributions (dividends).
3. Preferred stockholders are said to have ownership in the company in which they hold shares, this is because by purchasing the stocks of the company, they have invested in the company. Thereby sharing its ownership with the company founders and investors.
4. One peculiar characteristic of preferred stocks is that they can be converted into a specified number of common stocks at or after a preset date. This is known as convertibility.
5. Preferred stocks are a hybrid instrument since their holders are entitled to a fixed dividend payment like other debt holders and they also have the potential to increase in price like other equity.
6. Generally, preferred stocks do not come with voting rights hence their holders cannot partake in the corporate governance of their issuing company.
7. In some cases, previously unpaid dividends accumulate and have to be paid in the future along with the current dividends; that means the dividends are cumulative.

List of preferred stocks

1. Arlington Asset Investment Corp.
2. Brookfield Renewable Partners.
3. Cedar Realty Trust.
4. Dynex Capital, Inc.
5. Equitable Holdings, Inc.
6. Fortress Biotech Inc.
7. Garrett Motion Inc.
8. Hecla Mining Company.
9. Imperial Petroleum Inc.
10. J P Morgan Chase & Co.
11. KeyCorp
12. Liberty Broadband Corporation.
13. MetLife, Inc.
14. Navios Maritime Holdings Inc.
15. Oaktree Capital Group LLC.
16. Paramount Global.
17. Qurate Retail, Inc.
18. Rexford Industrial Realty, Inc.
19. Sunstone Hotel Investors, Inc.
20. Triton International Limited.
21. Urstadt Biddle Properties Inc.
22. Via Renewables, Inc.
23. Webster Financial Corporation.
24. XOMA Corporation.
25. Zions Bancorporation.

Listed above are some companies that issue preferred stock. Note that although these stocks also trade on the stock exchange, in most instances, they are differentiated from the common stocks of the same company by having a different ticker symbol or indicator.

Benefits and drawbacks of owning preferred stock

We shall discuss the benefits and drawbacks of owning preferred stocks. As an investor, these could help you decide if owning preferred stock is right for your financial plans at the moment or if it is something you will invest in in the future or not at all.

Benefits

1. Holders of preferred stock are assured of a regular fixed dividend payment until the call or maturity date which is normally preset. The call date is the date on or after which the issuing company can buy back the stock or the shareholder turns it in themselves. The maturity date is the date when the shareholder no longer gets paid dividends but rather gets paid back their initial principle. The maturity date for preferred stock is usually a long time spanning from thirty years and above.
2. When it comes to payment of dividends and claims on assets during a liquidation, preferred stock owners receive priority in both cases over common stockholders.
3. Since preferred stocks are also equity, their holders also have an ownership stake in the issuing company.
4. Preferred stocks can be converted into common stocks at or after a predetermined date. The number of common stocks a preferred stockholder will get per share is usually preset.

Drawbacks

1. Preferred stockholders have no say in the policies of the issuing company since they typically do not have voting rights.
2. Since the holders of this stock receive a fixed dividend payment, it means they will not share in higher distributions (dividends) because even when the issuing company declares more distributions than usual, they still get the same fixed amount.

Common vs preferred stock differences

1. Voting rights.
2. Dividend payment.
3. Maturity or call date.
4. Claim on assets at liquidation.
5. Capital gains.
6. Risks.
7. Type of security.
8. Stock price.

Although both common and preferred stocks can be issued by the same company, they have some inherent differences which have been listed above and we shall discuss below.

Voting rights

The most prominent feature of common stocks is that they give their owners the right to vote in the issuing company which makes them part of the various elections on the governing policies of said company. Preferred stock on the other hand typically has no voting rights and consequently, lacks a say in the company’s decision-making processes.

Dividend payment

When it comes to dividend payment, holders of preferred stock are more assured of getting dividends since theirs are usually fixed and the company is obligated to pay them. Additionally, previously unpaid dividends could also accumulate such that they have to be paid in the future along with current dividends. Furthermore, preferred stockholders receive priority during dividend payments. Conversely, the dividends of common stock are not fixed, the dividends when unpaid are not cumulative, the issuing company is not obligated to pay dividends on them and they only do get paid dividends if there are remaining dividends after preferred stockholders have been paid.

Maturity date

Common stocks have no maturity date which means they last into perpetuity or as long as the issuing company is operational, preferred stocks, however, have a maturity date at or after which their initial investment gets repaid.

Claim on assets at liquidation

If the issuing company is unable to continue operating and has to liquidate either voluntarily or involuntarily, preferred stockholders have a higher claim on the assets before common stockholders.

Capital gains

Common stockholders have a higher return potential especially when the issuing company declares excess distributions, this is because the preferred stockholders will still get paid a fixed amount irrespective of the excess whereas the common shareholders will partake in the excess declared distributions.

Risks

Preferred stocks are considered less risky than common shares, this is because they are less prone to price fluctuations, unlike common stocks whose prices are quite volatile.

Type of security

Preferred stock is a hybrid security instrument since it acts as equity representing ownership in the issuing company and as a debt due to its getting a fixed dividend payment. The common stock, however, is only equity which makes it a single instrument.

Stock price

In terms of stock price, preferred stocks tend to have a higher price than common stocks. This is likely because common stocks are much more readily issued by publicly traded companies due to the fact that they are not obligated to pay them dividends, unlike preferred stocks which have a fixed and cumulative dividend payment.

Common vs preferred stock differences

Common stock	Preferred stock
Dividends are not fixed.	Fixed dividends.
Has no maturity date.	Typically has a maturity or call date.
Riskier especially due to its price volatility.	Less risky with a more stable price.
Dividends do not accumulate.	Dividends could be cumulative.
Its stock price is affordable.	The stock price is usually expensive.
Has voting rights.	Generally, has no voting rights.
Get paid dividends last.	Receive priority at dividend payment.
It is equity.	It is both equity and debt.
Has a residual claim on assets at the company’s liquidation.	Has a higher claim on assets at the company’s liquidation.
Has a higher return potential due to capital gains.	Has a lesser return potential in terms of capital gains.

Similarities between common and preferred stock

Although common stocks and preferred stocks have quite a number of differences, they also share some similarities which we shall look at below.

1. They are both stocks.
2. Both stock types represent ownership in a company.
3. They can be issued by the same company.
4. Both common and preferred stocks have different types.
5. They are both means through which investors can benefit from the successes of the issuing company.
6. Both preferred and common stocks are traded on the stock exchange.

FAQs

Conclusion

Common vs preferred stock are the two main types of stocks that are issued by companies who are seeking to raise capital for various projects to further their businesses. They are both traded on the stock exchange and offer different benefits and drawbacks, both to the issuing company and their owners due to the different characteristics they possess.

Although they can both be issued by the same company and share some similarities, it is important that any person seeking to invest in either or both of them should take into account their personal financial and investment goals. Additionally, check if they match your investment time frame, and risk appetite.

Considering all the aforementioned and doing your personal research will aid in your final decision on whether or not common vs preferred stock are right for you.

Last Updated on November 6, 2023 by Nansel Nanzip Bongdap