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View Winners → Smart Women Smart Money: Dec 4, 2014
Arcadia Weekly Dec 04, 2014
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Emmy, is there much difference between common stock and preferred stock?
Yes, there is. Common and preferred stock are two different classes of public ownership in a company. Each stock type offers the shareholder different rights and benefits. Common stock, as the name implies, is most widely owned. Preferred stock is a bit of a misnomer because it’s not as in demand. All stockholders are partial owners of a company (voila, you’re now a small business owner) and can make money in two ways: capital appreciation and dividend income.
The most prominent difference between these two classes is that the value of common stock is far more volatile than with preferred stock. There is a greater potential for gain with common stocks; but also a greater chance for loss. However, profits aren’t made or lost until the shares are sold.
The price of common stock doesn’t necessarily reflect the actual value of the company. That is: the assets of the company minus its liabilities divided by the shares outstanding. The price of common stock is greatly affected by public perception.
For example, if a company gets good press, demand for its common stock typically increases. As more investors jump on the bandwagon, the share price goes up. A public-relations disaster may not affect a company’s actual value or earnings potential, but may significantly lower the share price if investors no longer want to maintain their financial association.
The price of preferred stock is more reflective of a company’s value and is typically more stable. Hence, there’s less potential to make large gains. Shareholders instead earn larger, more regular dividends and receive their payouts before common stockholders do.
This profit sharing practice is the second major difference. Common stock owners receive smaller dividends and these payments are given at the board of director’s discretion. As common stockholders are usually given voting rights, they have some small indirect sway on the company’s decision. Preferred stockholders generally don’t have voting rights. But if the company goes belly-up, they’ll get their share of any remaining assets ahead of common stockholders. This is a good time to be ‘preferred.’
Oftentimes, larger dividend payments come at the expense of greater stock price appreciation. This is because the company is distributing its profits to shareholders rather than reinvesting these profits back into the company – spurring growth. However, many investors choose preferred stock because it may pay large dividends that provide a steady stream of income.
Common stockholders are more willing to accept risk and most likely look to make long-term capital gains. Preferred stock owners generally care more about preserving their initial investment. Instead, they seek to earn an income from greater and more regular dividend payments. The decision to own either common or preferred stock depends largely on one’s investment strategy, financial goals and interest in exercising voting rights in the company.
Securities aim to provide stable dividend. Payments are dependent on several factors as market conditions& aren’t guaranteed. They may be discontinued or modified at any time. Securities and Advisory Services Offered Through NATIONAL PLANNING CORP.(NPC) Member FINRA, SIPC, a Registered Investment Adviser. EH Financial Group, Inc. and NPC are separate entities and unrelated companies
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