Introduction
Common stock refers to the type of security that represents standard ownership in a company. Shareholders get voting right and are eligible to receive dividends. On the other hand, preferred stock refers to the type of security that involves the features of both bonds and common stocks. Preferred stockholders receive fixed dividends and higher claim on assets. In this post we are going to discuss some major dissimilarities between these two types of stocks.
Difference Between Common Stock And Preferred Stock
Some notable differences between common stock and preferred stock can be pointed out as follows:
1. Meaning
Common Stock: It is a type of security issued by public companies to raise capital that provides partial ownership and voting rights to the shareholders.
Preferred stock: It is a type of share that offers fixed rate of dividends and higher claim on assets.
2. Ownership
Common Stock: Yes, it represents standard ownership in a corporation
Preferred Stock: It provides ownership with some preferential rights to the shareholders
3, Voting Rights And Management Participation
Common Stock: Shareholders get voting rights and can take part in management activities and decision making process
Preference Stock: As we know that preference stock carries the features of bond (debt instruments) it does not provide voting rights and stockholders cannot take part in the decision making process
4. Volatility
Common Stock: It is more volatile than preferred stock because of quick market fluctuation
Preferred Stock: It is less volatile or more stable in nature as compared to common share
5. Risk Involved
Common Stock: Level of risk is higher than preferred stock of volatility and uncertain returns
Preferred Stock: Because of less volatility and fixed and guaranteed dividends it is less riskier than common stock
6. Growth Potential
Common Stock: It has higher growth potential than preference share. The value of common stock rises if the company performs well.
Preference Stock: It has limited growth potential than common stock because it is like fixed income bond.
7. Dividend
Common Stock: Dividends are not predictable because there is no guarantee of dividend income
Preferred Stock: Usually dividends are predictable and guaranteed for preference shares
8. Liquidity
Common Stock: Common shares are more liquid than preference stocks because they can be easily sold or bought on public exchanges
Preferred Stock: It is less liquid than common stocks because of lower trading volume
9. Ideal For
Common Stock: It is best for those investors who are seeking for long-term growth and can tolerate high level of risk
Preferred Stock: It is ideal for those people who want regular and stable income
10. Claim On Assets
Common Stock: Common shareholders are paid after preference shareholders . So, common stocks have lowest priority during liquidation.
Preferred Stock: It has higher priority during liquidation. Preferred stockholders are paid before common shareholders.
Comparison Between Common Stock And Preferred Stock
(Common Stock Vs Preferred Stock)
|
Basis |
Common Stock |
Preferred Stock |
|
Voting Rights |
Yes |
No |
|
Dividend |
Not Fixed |
Fixed |
|
Risk |
High |
Low |
|
Volatility |
High |
Less |
|
Growth Potential |
High |
Low |
|
Liquidity |
High |
Low |
|
Claim On Assets |
Last priority |
Higher priority |
|
Convertible |
No |
Yes |
|
Management Participation |
Yes |
No |
