Common Stock vs Preferred Stock| What are The Key Difference Between Common and Preferred Stocks?

Table of Contents:

Common Stock vs Preferred Stock

Which Stock is Better in Common and Preferred?

Common Stockholder vs Preferred Stockholder

Examples of Common Stock

Examples of Preferred Stock

Common stocks and preferred stocks are two types of ownership in a company, each with its own characteristics and rights. The main differences between common shares and preferred shares lie in the rights associated with ownership, dividend payments, and priority in case of liquidation or bankruptcy. Here are the key differences between common stock and preferred stock:

1. Ownership Rights:

Common Shares: Common shareholders have voting rights in the company, allowing them to participate in corporate decision-making processes, such as electing the board of directors and approving major company changes.

Preferred Shares: Preferred shareholders generally do not have voting rights. However, in some cases, they may have limited voting rights on specific matters that directly affect their rights and privileges.

2. Dividend Payments:

Common Shares: Dividends on common shares are typically paid out of the company’s profits after all obligations, including preferred share dividends, have been fulfilled. Common shareholders may receive dividends, but the amount is not fixed and can fluctuate based on the company’s performance and the decision of the board of directors.

Preferred Shares: Preferred shareholders are entitled to receive a fixed dividend amount or a predetermined dividend rate. These dividends are usually paid out before any dividends are distributed to common shareholders. Preferred dividends are generally set at a fixed amount or as a percentage of the par value of the shares.

3. Liquidation or Bankruptcy:

Common Shares: In the event of liquidation or bankruptcy, common shareholders have the lowest priority in terms of recovering their investment. They are entitled to the remaining assets of the company only after all debts and obligations to creditors, bondholders, and preferred shareholders have been satisfied.

Preferred Shares: Preferred shareholders have a higher claim on the company’s assets in case of liquidation or bankruptcy. They have priority over common shareholders but are subordinate to bondholders and other debt holders. Preferred shareholders are generally entitled to receive their initial investment back before any distribution is made to common shareholders.

4. Price Volatility and Risk:

Common Shares: Common shares are more susceptible to price volatility as their value is directly linked to the company’s performance and market factors. They offer potential for capital appreciation but also carry higher risk compared to preferred shares.

Preferred Shares: Preferred shares are generally less volatile in price compared to common shares. They offer a more stable income stream through fixed dividends but may have limited potential for capital appreciation.

Which Stock is Better in Common and Preferred?

Determining whether common shares or preferred shares are better, it depends on your investment goals, risk tolerance, and the specific characteristics of the stocks in question. Here are a few points to analyse:

1. Growth Potential: Common shares typically offer greater potential for capital appreciation because their value is directly linked to the company’s performance and growth. If you believe in the long-term growth prospects of a company, investing in its common shares may provide the opportunity for higher returns.
2. Income Stability: Preferred shares generally provide a more stable income stream through fixed dividends. If you prioritize consistent income over capital appreciation and are less concerned about potential share price growth, preferred shares may be more suitable. However, it’s important to note that preferred share dividends are typically fixed and may not increase even if the company performs well.
3. Voting Rights: If having a say in corporate decision-making is important to you, common shares are the way to go. Common shareholders have voting rights, allowing them to participate in important decisions such as electing the board of directors or approving major company changes.
4. Risk Tolerance: Common shares are generally considered riskier than preferred shares. Common shareholders bear the brunt of any potential losses in the company and have lower priority in case of liquidation or bankruptcy. On the other hand, preferred shareholders have a higher claim on the company’s assets and may be more protected in adverse situations.

Common Stockholder vs Preferred Stockholder:

Common Stockholder: A common stockholder, also known as an equity or ordinary stockholder, is an individual or entity that owns common stock in a corporation. Common stock represents ownership in a company and typically comes with voting rights at shareholder meetings. Common stockholders have the potential for capital appreciation and may receive dividends if the company declares them. However, they are the last in line to receive payments in the event of bankruptcy or liquidation and may bear the highest risk compared to other stakeholders.

Preferred Stockholder: A preferred stockholder is an individual or entity that owns preferred stock in a corporation. Preferred stock is a type of equity security that combines characteristics of both common stock and bonds. Preferred stockholders have a higher claim on the company’s assets and earnings than common stockholders. They generally have a fixed dividend rate, which means they receive a predetermined dividend before any dividends are paid to common stockholders. In case of bankruptcy or liquidation, preferred stockholders have a higher priority in receiving their investment back than common stockholders.

Examples of Common Stocks:

1. Apple Inc. (AAPL): Apple is a technology company known for its iPhones, iPads, Mac computers, and other consumer electronics and software.
2. Microsoft Corporation (MSFT): Microsoft is a multinational technology company specializing in software development, cloud computing, and computer hardware, including its Windows operating system.
3. Amazon.com Inc. (AMZN): Amazon is a global e-commerce and technology company. It started as an online marketplace for books and has expanded to offer a wide range of products and services, including Amazon Prime and Amazon Web Services (AWS).
4. Google (Alphabet Inc.) (GOOGL): Google is a multinational technology company known for its search engine and online advertising platforms. Alphabet Inc. is the parent company of Google.
5. Reliance Industries Limited (RELIANCE): Reliance Industries is a conglomerate engaged in various industries such as petrochemicals, refining, oil and gas exploration, telecommunications, retail, and more.
6. Tata Consultancy Services Limited (TCS): TCS is one of the largest IT services companies in India, offering a wide range of services including software development, consulting, and IT outsourcing.
7. Hindustan Unilever Limited (HINDUNILVR): Hindustan Unilever is a consumer goods company that manufactures and sells a variety of products, including personal care items, food and beverages, and cleaning agents.
8. HDFC Bank Limited (HDFCBANK): HDFC Bank is one of the leading private sector banks in India, offering a range of financial products and services, including retail banking, corporate banking, and wealth management.

Examples of Preferred Stock:

1. Coca-Cola Company (KO) – Coca-Cola has issued several series of preferred stock, such as the Series B, Series C, and Series D preferred stock. These preferred stocks offer a fixed dividend rate and are traded on stock exchanges.
2. Ford Motor Company (F) – Ford has issued preferred stock, such as the Ford Motor Company 6.20% Cumulative Convertible Preferred Stock. These preferred stocks have a fixed dividend rate and the option to convert them into common stock.
3. General Electric Company (GE) – General Electric has issued preferred stock, including the General Electric Company 4.50% Cumulative Convertible Preferred Stock. These preferred stocks offer a fixed dividend rate and the ability to convert them into common stock.
4. JPMorgan Chase & Co. (JPM) – JPMorgan Chase has issued preferred stock, such as the JPMorgan Chase & Co. Series X Preferred Stock. These preferred stocks provide a fixed dividend rate and are traded on stock exchanges.
5. Tata Motors Limited – Tata Motors has issued preferred shares, such as the Tata Motors Limited 7.50% Cumulative Redeemable Preference Shares. These preferred shares offer a fixed dividend rate and have a cumulative feature, meaning any unpaid dividends accrue and must be paid before common shareholders receive dividends.
6. ICICI Bank Limited – ICICI Bank has issued preferred shares, such as the ICICI Bank Limited 9.40% Perpetual Non-Cumulative Preference Shares. These preferred shares offer a fixed dividend rate but do not have a cumulative feature, and the dividends are non-cumulative, meaning any unpaid dividends do not accrue.
7. State Bank of India – State Bank of India has issued preferred shares, such as the State Bank of India 8.15% Perpetual Non-Cumulative Preference Shares. These preferred shares offer a fixed dividend rate and do not have a cumulative feature.
8. HDFC Bank Limited – HDFC Bank has issued preferred shares, such as the HDFC Bank Limited 8.85% Perpetual Non-Cumulative Preference Shares. These preferred shares offer a fixed dividend rate and do not have a cumulative feature.

Summary: Preferred stock often does not carry voting rights, or if it does, they are limited compared to common stock. Preferred stock may have other features, such as the ability to be converted into common stock or callable by the company at a specified date or price.

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