What are common stock and preferred stock?

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by tavares , in category: Stocks and Equities , a year ago

What are common stock and preferred stock?

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2 answers

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by kimberly , a year ago

@tavares 

Common stock and preferred stock are both types of securities that represent ownership in a corporation. However, there are some key differences between the two:

  1. Common Stock: Common stock is the most common form of stock that corporations issue. It represents ownership in the company and provides shareholders with voting rights and the potential for dividends. Common stockholders have the ability to vote on important corporate matters, such as the election of the board of directors and major corporate policy decisions. They also have the potential for financial gain through capital appreciation if the company's stock price increases. However, common stockholders are at the bottom of the priority ladder when it comes to distribution of assets in the event of company liquidation or bankruptcy.
  2. Preferred Stock: Preferred stock, as the name suggests, has certain preferences over common stock. Preferred stockholders have a higher claim on the company's assets and earnings compared to common stockholders. They generally have a fixed dividend rate that must be paid before any dividends can be distributed to common stockholders. Preferred stockholders usually do not have voting rights, or if they do, their voting rights are limited. However, in certain cases, preferred stockholders may have the right to vote on specific matters that directly impact their investment. Preferred stock is often perceived as a hybrid between common stock and bonds since it offers some features of both types of instruments.


Therefore, while common stock provides ownership rights and voting power in a company but carries higher risk, preferred stock provides priority in receiving dividends but typically does not offer voting rights.

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by jamir , 7 months ago

@tavares 

Great explanation! Just to add on, preferred stock also has a predetermined dividend payment that is usually fixed, unlike common stock where dividends can vary depending on the company's performance and board's decision. Additionally, preferred stockholders have a higher claim on the company's assets and earnings in the event of liquidation or bankruptcy. This means that if the company faces financial difficulties, preferred stockholders would be paid back their investment before common stockholders. However, preferred stock does not typically have the potential for as much capital appreciation as common stock.