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The differences and similarities between common stocks and preferred stocks are numerous.

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 may not. Most common stock gives the owner one vote per number of shares owned, although that is not always the case. Some preferred stock grants one vote per share, while others provide more, fewer or no voting privileges at all. 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.

Preferred stockholders have a greater claim to a company's assets and earnings. This is true during the good times when the company has excess cash and decides to distribute money in the form of dividends to its investors. In these instances when distributions are made, preferred stockholders must be paid before common stockholders. However, this claim is most important during times of insolvency when common stockholders are last in line for the company's assets. This means that when the company must liquidate and pay all creditors and bondholders, common stockholders will not receive any money until after the preferred shareholders are paid out.

Dividends 

The dividends of preferred stocks are different from and generally greater than those of common stock. When you buy a preferred stock, you will have an idea of when to expect a dividend because they are paid at regular intervals. This is not necessarily the case for common stock, as the company's board of directors will decide whether or not to pay out a dividend. Because of this characteristic, preferred stock typically doesn't fluctuate as often as a company's common stock and dividends are typically guaranteed, meaning that if the company misses one, it will be required to pay it before any future dividends are paid on either stock.

The dividend yield of a preferred stock is calculated as the dollar amount of a dividend divided by the price of the stock. This is often based on the par value before a preferred stock is offered. It's commonly calculated as a percentage of the current market price after it begins trading.

Hybrid security

Preferred stock is sometimes referred to as a hybrid security due to its bond-like characteristics. Like bonds, preferreds have a par value which is affected by interest rates. When interest rates rise, the value of the preferred stock declines, and vice versa. With common stocks however, the value of shares is regulated by demand and supply of the market participants.

In general, preferred stocks are less volatile than common stocks. However, like all assets in an open market, there have been times when preferred stocks have been volatile and lost value.

Unlike common shares, preferreds also have a callability feature which gives the issuer the right to redeem the shares from the market after a predetermined time. Investors buying preferred shares have a real opportunity for these shares to be called back at a redemption rate representing a significant premium over their purchase price. Markets for preferred shares often anticipate call backs and prices may be bid up accordingly.

Trading shares

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. Receiving steady income is attractive to some investors, whereas the potential for significant capital gains may appeal to others.

Converting shares

Finally, preferred shares can be converted to a fixed number of common shares, but common shares don't have this benefit. Looking up a preferred stock's quote is as easy as looking up the quote for a common share. For example, an investor that wants to look up the quote of both common and preferred stock for Wells Fargo would use the ticker symbol WFC for common shares and WFC.PRX, WFCPRX, or WFC-PX for the company's Series X Class A preferred stock.

To sum up: a good way to think of a preferred stock is as a security with characteristics somewhere in-between a bond and a common stock.

(To learn more about the similarities and differences of common and preferred shares, see our Stock Basics Tutorial.)

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