Issuing stocks is a way for companies to raise money for their business activities and expansion efforts. Companies may offer a piece of ownership of their firm to the public by selling common stocks or preferred stocks.
Learn what each one means and the differences between them.
What are their similarities?
Preferred stocks and common stocks both represent shares of ownership in a company. Buying either one means you’re a part-owner of the company that issued the stocks.
They are also both traded on a stock exchange, like the Philippine Stock Exchange (PSE).
How do they differ?
The main differences between preferred and common stocks include:
-
Dividend payments
Preferred stocks aim to provide consistent dividends, which are portions of a company’s earnings that are paid out to shareholders.
That’s why many investors see preferred shares as a cross between stocks and bonds, since bonds also offer fixed payments in the form of coupons.
With common stocks, dividends aren’t fixed. A company’s board of directors can decide to reduce, pause, or stop such payments.
Keep in mind that dividends aren’t guaranteed for either type of shares. However, preferred shareholders are prioritized when a company is able to pay dividends.
-
Voting rights
Owning common shares typically grants you the right to vote on company matters. This means you can weigh in on company decisions, like who sits on the board of directors.
Preferred stockholders usually don’t have voting rights.
-
Payment priority
If a company runs into financial trouble and must liquidate its assets, preferred shareholders get paid first before common shareholders.
-
Risk
Common shares are more widely available and more actively traded than preferred shares. Because of this, common stocks tend to go up and down more in price.
This means you may earn more with common stocks, but you may also lose more. Preferred stocks tend to be more stable, but they’re less likely to grow in value by a lot.
Preferred shares can also be harder to sell since they’re not as actively traded.
Other features of preferred stocks
Preferred stocks share other similarities with bonds. When interest rates rise, the value of such assets declines, and vice versa.
Like callable bonds, preferred stocks may also be redeemable. This feature gives an issuing company the right to buy back preferred shares from shareholders, ending future dividend payments.
Some preferred stocks may offer “cumulative” dividend payments. If a company fails to pay out dividends for a certain dividend period, the payments will add up until that company is able to pay.
In cases like this, dividends for preferred shares (including those accumulated from past payment postponements) must be given before those of common stock.
Preferred shares may either be convertible or non-convertible into common shares.
To sum up, here is a quick comparison of preferred and common shares:
| Common stock | Preferred stock |
| May or may not pay dividends | Aims to pay regular dividends |
| Tends to grant voting rights | Usually no voting rights |
| More volatile | Less volatile |
| More liquid | Less liquid |
Each type may be a good choice depending on what your portfolio currently needs and what you hope to achieve for your future.
Preferred shares may suit those who seek regular income from investments, while common shares can appeal to investors who aim for long-term growth.
Know the things to consider before investing in a company and keep your goals and risk tolerance in mind when making investing decisions.
