Question

What are the differences between preferred and common stock? Describe some situations when common stock is a better choice for investors.

Answer 1

The differences between Common stock and Preference stock may be summarized as below:

Nature:

Common stock refers to stock that confers ownership rights and voting rights to the person holding it. Common stock holders occupy the highest position in the Management Hierarchy and are entitled to vote on all major decisions relating to the company.

Preference stock confers no ownership or voting rights.

Preference for payment of dividend and repayment of capital.

Preference stock holders have preference over common stock holders with respect to payment of dividend and repayment of capital.

Fixity of amount of dividend.

Preference dividend is a fixed rate, generally, though they may have participating right in surplus profits remaining after payment of specified dividend to common stock holders.

Redemption/Conversion:

Preference shares can be redeemed/converted as per terms of issue, but common shares cannot be converted and are redeemed generally on liquidation.

Right to vote:

Common stock holders have voting rights in the general meetings of the company, whereas preference stock holders.

BETTER CHOICE:

Common stock is a better choice for investors if the particular company is doing well and is expected to provide higher dividends than preferred stock and also has growth potential.