Common Stock vs Preferred Stock – Similarities, Advantages, and Disadvantages

If you want to be successful as an investor, you need to educate yourself about any investment options you might want to consider in the future. Given the popularity of stock investing, there’s an excellent chance at least a portion of your investment portfolio is going to include stocks. If that’s indeed a possibility, you have to think about your knowledge base regarding stock investing.

At the most basic level, you should educate yourself about different types of stocks. Without getting into too much detail, the following discussion is going to focus on common stock versus preferred stock. Remember, corporations initially sell shares in the company as a means of raising capital for future business endeavors.

Common Stock Definition

According to the Collins Dictionary website, Common stock is defined as: “shares in a company that are owned by people who have a right to vote at the company’s meetings and to receive part of the company’s profits after the holders of preferred stock have been paid.” Additionally, common stockholders could be entitled to a proportionate share of the corporation’s assets after debts have been repaid during a liquidation process.

Common Stock Examples

 Available common stock issues are listed on popular stock exchanges like the NASDAQ and NYSE. Examples of common stocks (see stock symbol) and its current prices would include: IBM (IBM) $138.31 per share, McDonald’s (MCD) $211.98 per share, Disney Corporation (DIS) $144.33 per share, Microsoft (MSFT) $167.10 per share and Apple Inc. (AAPL) $318.73 per share.

Preferred Stock Definition

Again from the Collins Dictionary website, preferred stock is defined as “shares representing part of the capital issued by a company and entitling their holders to priority with respect to both net profit and net assets. Preferred stock usually carries a definite rate of dividend that is generally lower than that declared on common stock.”

Preferred Stock Examples

A great majority of the stock sold through exchanges would be common stocks listed in the names of many of the world’s top companies. Preferred stocks are a little more difficult to find, but they are listed on the same exchanges as common stocks. Note: preferred stocks are usually found available in the financial, utility and insurance sectors. Here’s a few examples of good preferred stocks (see stock symbol) with current stock price and annual dividend: Alabama Power Company 5.00% Class A Cumulative Preferred Stock (ALP-Q) $1 par with annual dividend of 7.75%, Bank of America ADRs of 6.000% Non-Cumulative Preferred Series GG (BAC-B) $1 par with annual dividend of 6% and Goldman Sachs ADRs of 6.30% Non-Cumulative Preferred Series N (GS-N) $1 par with a $6.3% dividend.

Similarities Between Common and Preferred Stock

Truthfully, there are very few similarities between common and preferred stock. The similarities include both types are issued to raise capital for the company, both types are eligible to earn dividend (guaranteed for preferred stockholders), both types are sold over major stock exchanges and both types have a claim against corporate assets in case of company liquidation with preferred stockholders getting preference.

How to Buy Common and Preferred Stock

If you are interested in buying stocks, both common and preferred for your investment portfolio, you’ll need to open a brokerage account. You can choose a managed account through a retail brokerage firm or you can open an online account that you’ll manage yourself.

Once you account is open, you’ll need to fund your account. At that point, you are ready to make purchases. The next step is to decide which stocks you wish to buy. To avoid buying weak stocks, you should do some analysis or consult with a stock analyst.

With a target stock in mind, you’ll go through your investment account to the market place where you’ll place an order for the stock you want to purchase. If you enter a “market order“, you will immediately have your order filled at the current market price. With a “closed or stated order”, you enter a “bid” price that will be filled once your order is matched up with a seller willing to sell at that bid price.

Typically, stocks are sold in blocks of 100 shares. Any other denomination is called an “odd lot”, which carries a small pricing premium.

Preferred Stock Advantages and Disadvantages

Preferred stock is ideally suited for investors interested in a steady flow of income. The advantages of this investment option include earning annual dividends that are guaranteed and having preference over the company’s assets in case of liquidation.

The disadvantages include little to no increase in valuation and no voting rights regarding corporate matters.

Preferred Stock vs Common Stock Valuation

For the most part, a preferred stock maintains a valuation equal to the stated par value of the stock at issuance. This price will tend to be stagnant over any period of time. Meanwhile, common stock prices are driven by market forces. If a company has great success, the demand for it’s stock will rise, which will likely translate into a drastic increase in the stock’s value. If a company is struggling, the stock value would likely succumb to downward pressure from selling. Your stock preference should be driven by your investment goals. If you seek a steady stream of income, preferred stock is the call. If you are looking for investment appreciation and flexibility, go with common stock issues.