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Difference Between Preferred Stock and Common Stock

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Preferred Stock vs Common Stock: Dividend, Voting Rights, and Liquidity Compared

Understanding the difference between preferred stock and common stock is important for students of financial management. These concepts are key not only for school and competitive exams but also for making informed business or investment decisions. This page from Vedantu explains the topic with clear definitions, a comparative table, and real-world examples useful for both exams and practical situations.


 
Difference Preferred Stock Common Stock
Dividend Payment Fixed and paid before common stock Variable, paid after preferred stock
Voting Rights Usually no voting rights Usually one vote per share
Liquidation Priority Priority over common stock in asset distribution Paid last after all creditors and preferred stockholders
Growth Potential Limited price appreciation Higher growth, unlimited potential
Volatility Less volatile More volatile
Convertible Option Some types can be converted to common stock Not convertible to preferred stock
Liquidity May be less liquid Generally highly liquid
Risk in Bankruptcy Lower than common stockholders Highest risk among shareholders

 

Difference Between Preferred Stock and Common Stock

The main difference between preferred stock and common stock is that preferred shareholders have first right to receive dividends and asset repayment if the company liquidates, while common shareholders have voting rights and higher growth potential but receive dividends after preferred shareholders.


Preferred Stock Explained

Preferred stock is a type of share that offers fixed dividends and has priority over common stock in dividends and company assets during liquidation. However, it usually does not provide voting rights in company meetings.


Main Features of Preferred Stock

  • Receives fixed, regular dividends before common stock dividends.
  • Usually does not allow shareholders to vote at meetings.
  • Has priority claim on company assets in case of liquidation.
  • Types include cumulative, non-cumulative, convertible, and callable shares.
  • Less volatile and attractive for investors seeking stable returns.

Example of Preferred Stock

For example, a bank issues "ABC Bank 7% Cumulative Preferred Stock." Shareholders receive a 7% fixed dividend each year. If not paid in one year, it accumulates and must be paid in the future, before any dividend to common shareholders.


Common Stock Explained

Common stock refers to standard shares of a company that provide voting rights and potential for price growth. Holders are the last to receive dividends and assets but can benefit from company expansion over time.


Main Features of Common Stock

  • Offers voting rights at shareholder meetings.
  • Dividends are not fixed; may be high, low, or skipped.
  • Shareholders have the highest risk in bankruptcy—but also the highest growth upside.
  • Highly liquid and easy to trade on the stock market.

Example of Common Stock

Suppose "XYZ Technologies" issues common stock to the public. Investors who buy these shares can attend annual general meetings and approve board decisions, but they only receive dividends if decided by the company.


Practical Application: Which Should You Choose?

Choosing between preferred stock and common stock depends on your goal. Preferred stock suits students or investors seeking steady, reliable income and lower risk. Common stock is ideal for those who want voting rights and higher growth, accepting extra risk.


  • Preferred stock = Stability + Fixed Income
  • Common stock = Voting Rights + Growth Potential

On a company’s balance sheet, both stocks appear under Share Capital, but in separate categories.


Why Do Companies Issue Preferred Stock?

Companies might issue preferred stock to raise funds without giving up voting control. It attracts investors looking for safety and predictability, and can strengthen the company’s capital structure.


Real-World Importance for Students

Understanding the difference between preferred stock and common stock is tested in board exams, commerce Olympiads, and entrance tests. It’s also crucial for those planning business, law, or banking careers—helping you interpret balance sheets and make smart financial decisions.


Related Concepts & Further Reading


In summary, preferred stock and common stock are two main types of shares, each with unique rights—dividend priority, voting power, growth, and risk. Knowing their differences will boost your score in commerce exams and support smart financial decisions. At Vedantu, we simplify topics like these to help you succeed in your academic and business journey.

FAQs on Difference Between Preferred Stock and Common Stock

1. What is the difference between preferred stock and common stock?

The main difference between preferred stock and common stock lies in their dividend rights, voting rights, and liquidation preferences. Preferred stockholders typically receive dividends before common stockholders and have priority in asset distribution during liquidation, but usually lack voting rights. Common stockholders have voting rights but receive dividends after preferred stockholders.

2. What is the difference between preferred stock and common stock quizlet?

While Quizlet doesn't directly define the difference, it highlights key distinctions between preferred and common shares. These differences center on dividend priority (preferred shares paid first), voting rights (common shares usually have voting power), and liquidation preferences (preferred shares receive assets first in bankruptcy). Understanding these core differences is crucial for finance exams.

3. What is an example of preferred stock?

Preferred stock examples include specific issues by large corporations and banks, often described as "[Company Name] X% Preferred Stock." For instance, "ABC Corporation 6% Preferred Stock" indicates a preferred share issued by ABC Corporation that pays a 6% dividend. The specifics—dividend rate, convertibility, and other features—vary between different issuers.

4. Why would a company issue preferred stock over common stock?

Companies might choose preferred stock over common stock to raise capital without diluting voting control. Issuing preferred stock allows companies to attract investors seeking a steady stream of dividends while retaining managerial power vested in common stockholders. It's a strategy to balance the needs of different investor groups and manage financial risk.

5. Does preferred stock have voting rights?

Generally, preferred stock does not grant voting rights. Common stock, on the other hand, usually includes voting rights allowing shareholders to participate in corporate decisions. This distinction is a core difference between these two types of shares, shaping investor participation in corporate governance.

6. What are common stock examples?

Common stock examples include shares issued by publicly traded companies like Apple Inc. (AAPL) or Microsoft Corp. (MSFT). These shares represent ownership in the company and typically grant voting rights, allowing shareholders to influence corporate decisions. Investing in common stock means you become a part-owner and may benefit from future growth but also face the potential for losses.

7. Can preferred stock be converted into common stock?

Some preferred stock is convertible, meaning it can be exchanged for common stock under specific terms. Convertible preferred stock offers investors the possibility of participating in future growth if the company prospers and the common stock price increases. The conversion terms are usually detailed in the stock's prospectus.

8. What is the primary difference between preferred stock and common stock?

The primary difference is in dividend and liquidation priority. Preferred stockholders are paid dividends before common stockholders and receive assets first in a liquidation event. However, common stockholders typically have voting rights, while preferred stockholders usually do not. This affects both income stream and control over the company.

9. How are preferred and common stocks shown differently on a company’s balance sheet?

Both preferred and common stock are reported under shareholders' equity on a company's balance sheet, but are typically listed separately. This allows investors and analysts to see the breakdown of equity financing between these two types of shares and better understand the company’s capital structure.

10. What happens to stockholder rights if a preferred share is converted to common?

When a preferred share is converted into common stock, the holder loses the priority for dividends and liquidation but gains voting rights. The holder becomes a common stockholder with all associated rights and risks, including participation in company profits (or losses) and the ability to vote on corporate matters.