A:

First, let's look at the differences and similarities between common stocks and preferred stocks. Both represent a piece of ownership in a company, and both are tools investors can use to try to profit from the future successes of the business. The main difference between the two types of stock is that holders of common stock typically have voting privileges, whereas holders of preferred stock do not. However, preferred stockholders receive a fixed dividend from the company, while common shareholders may or may not receive one (depending on the decisions of the board of directors). In the newspaper, preferred shares are usually distinguished by a ".PR" or ".PF" following their ticker symbol. (For more comparisons, see What is the difference between preferred stock and common stock?)

When valuing common and preferred stocks, an investor must consider the different properties of each type. Common stock may not offer the possibility of dividends, but generally investors will hold this type of stock because they are expecting to capture profit through a capital gain, or an increase in the stock price. Preferred stockholders, on the other hand, are generally interested in receiving a constant cash flow in the form of a dividend. In this sense, preferred stock acts similarly to a fixed-income security, such as a bond, which distributes a regular coupon payment.

Preferred stock trades the same way as common stock, usually through a brokerage firm and with the same transaction costs. Because the properties generally associated with these stocks will affect the way investors value them, the prices of common and preferred stocks offered by the same company will differ. Preferred stocks tend to be more stable because of the regular income stream, while common stock can be more volatile.

Common and preferred stocks offer different things to different people. Receiving steady income is attractive to some investors, whereas if there is a possibility for company growth, great capital gains may appeal to others.

To learn more, check out the Stock Basics Tutorial.

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