Common vs. Preferred Stock: What Retail Investors Should Know
3 min read
When you're starting out as a retail investor (aka someone in the general public), you'll learn about common and preferred stocks. What are the different types of common stock, how are preferred shareholders prioritized, and what are the differences between the two types of investments?
Let's cover all these questions and more about common vs. preferred stock.
What is common stock?
Common stock is a share of a corporation.
Common stockholders in the U.S can elect a board of directors and vote on policies. These shareholders have rights to company assets only after preferred shareholders, bondholders, and others are paid in full.
There are different types of common stock, but it's important to note that common stock generally outperforms bonds and preferred stock in the long term.
What is preferred stock?
Preferred stockholders usually get higher dividends and first claim to asset distribution ahead of common stockholders. However, these stockholders have little to no voting rights when it comes to governing the company. Preferred stocks are similar to bonds, and are referred to as hybrid securities.
There are three types of preferred stocks: Convertible, cumulative, and redeemable.
Preferred stock is also "callable," which means that the company issuing the stock has the right to redeem it at a predetermined price and date, indicated in the company's prospectus.
The differences between common vs. preferred stock
Common stock is like the general public whereas preferred stock is more akin to the VIP section.
Preferred stockholders receive a fixed dividend and are first to receive dividends over common shareholders.
On the other hand, common stockholders may not always receive a dividend. They're also last in line in the event of a liquidation such as bankruptcy.
Preferred stock does not appreciate or depreciate as much as common stock does, and preferred stockholders don't have voting rights, especially in the U.S.
This contrasts to the voting rights in Saudi Arabia, where all shareholders have the right to a portion of the net distributed profits. Saudi Arabian investors can also receive a portion of a company's assets upon liquidation, have full voting rights, and freely dispose of the shares they own at any time.
Preferred stock can be changed to a fixed number of common stock, but common stock cannot be converted to preferred stock.
An example of common vs. preferred stock in the real world
Most people who own stock in Berkshire Hathaway Inc. will own Class B, or common stock. It's called BRK.B, and it's valued at $279.88 per share as of July 1, 2021. However, the company also has a class A preferred stock called BRK.A. It's valued at a whopping $420,967.70 per share.
What stock do retail investors get?
Retail investors primarily have access to common stock. Preferred stock is typically reserved for a higher class of individual investors or institutions such as hedge funds.
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