What are stocks?
Investors purchase stocks in companies that they think will go up in value. If the company goes up in value, the company’s stock increases in value as well. They can then be sold for a profit.
- An investment
- Securities that represent an ownership share in a company
- Issues of a stake of ownership in a company
- A claim to the company’s assets and earnings that often give the investor voting rights and pays dividends
For a more in-depth explanation view our previous blog.
What is the difference between Common Stock and Preferred Stock?
What is Common Stock?
Common stock, also addressed as shares, are the type of stock in which most people invest in. Common stock represent a claim on the company’s profits. These claims on profits are often paid out in the form of dividends.
Common stock typically outperforms bonds and preferred shares. Common stock has the highest potential for long-term gains. If a company increases in value, the value of common stock will go up. Likewise, if the company decreases in value, the stock’s value decrease as well. The constant fluctuation in value is the main reason common stock is more valuable in terms of long-term investment.
Additionally, common stock provides stockholders the ability to exercise control over corporate policy and management issues due to common stock typically providing stockholders with voting rights to elect board members who oversee the major decisions made by management. Voting rights given to a stockholder will depend on the number of shares held by the stockholder.
Preferred shareholders have priority over common shareholders regarding dividends. The company pays out dividends on its discretion, and will always pay preferred shareholders first, over common shareholders. Preferred stocks, like bonds, typically pay out fixed dividends, or distributions of a company profits, on a regular schedule.
The terms of a preferred stock are variable and determined by the company, similar to bonds. Preferred stocks are not as risky as common stock, but still riskier than bonds. Unlike common stock, preferred stock does not offer shareholders voting rights.
- The main difference in common stock and preferred stock is that preferred shareholders are not given voting rights like common shareholders are
- Preferred shareholders have priority over a company’s income, meaning they are paid dividends before common shareholders
- Preferred stock have characteristics of both bonds and common stock which enhances its appeal to certain investors
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