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.

RELATED FAQS
  1. What is common stock and preferred stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ... Read Answer >>
  2. What are some examples of preferred stock, and why do companies issue it?

    Understand the difference between preferred stock and common stock, and learn the primary reasons why companies issue preferred ... Read Answer >>
  3. What is the difference between the equity market and the stock market?

    Discover the basic information about the equity, or stock, market and the two primary classifications of equities that are ... Read Answer >>
  4. What is the difference between preferred stock and common stock?

    Preferred and common stocks are different in two key aspects. First, preferred stockholders have a greater claim to a company's ... Read Answer >>
  5. What are the pros and cons of owning preferred stock instead of common stock?

    Understand and explore the advantages and disadvantages of owning preferred stock as opposed to owning common stock shares ... Read Answer >>
  6. How does preferred stock differ from company issued bonds?

    Discover the primary differences between preferred stock and corporate bonds, two income-generating investment vehicles issued ... Read Answer >>
Related Articles
  1. Options & Futures

    20 Investments: Preferred Stock

    What Is It? Preferred stock represents ownership in a company, but it usually does not give the holder voting rights (this may vary depending on the company). With preferred shares, investors ...
  2. Professionals

    Preferred Stock

    Series 7 - Equities Section 3: Preferred Stock
  3. Professionals

    C. Why Do People Buy Common Stock?

    The main reason people invest in common stock is for capital appreciation. They want their money to grow in value over time. An investor in common stock hopes to buy the stock at a low price ...
  4. Investing Basics

    What is Convertible Preferred Stock?

    Convertible preferred stock is preferred stock that can be converted into common stock as of a predetermined date at a specified ratio.
  5. Investing Basics

    The Different Between Preferred and Common Stock

    Preferred and common stocks are different in two key ways.
  6. Professionals

    Preferred Stock Features

    An individual investor looking into preferred stocks should carefully examine both their advantages and drawbacks.
  7. Professionals

    Corporate Securities: Preferred Stock

    Preferred stock is not issued by all companies. It is called "preferred" because its holders receive available dividend payments before common stockholders, and they also receive payments ...
  8. Investing Basics

    Stocks Basics: Different Types Of Stocks

    There are two main types of stocks: common stock and preferred stock. Common Stock Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, ...
  9. Markets

    What Is The Difference Between Preferred Stock And Common Stock?

    Most investors are familiar with common stock, but many know little about another form of company ownership: preferred stock.
  10. Term

    The Advantages of Preferred Dividends

    Preferred dividends are cash distributions a company pays on its preferred shares.
RELATED TERMS
  1. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  2. Preference Shares

    Company stock with dividends that are paid to shareholders before ...
  3. Common Stock Equivalent

    Securities such as stock options, warrants, preferred bonds, ...
  4. Prior Preferred Stock

    A type of preferred stock with a higher claim on assets and dividends ...
  5. Preferred Stock ETF

    An exchange-traded fund that either tracks a preferred stock ...
  6. Participating Preferred Stock

    A type of preferred stock that gives the holder the right to ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center