What are the differences between common stock and preference stock? There are a few notable differences between each.
Common stock is ownership in a company, just the basic stock that we're used to trading. Companies sell common stock through public offerings, and it's traded among investors on the secondary market. Those who hold the stock hope to earn dividends from their share of company profits. However, many profitable companies don't pay dividends, and never have any intentions of doing so (i.e. Microsoft). The obvious risk with common stock is that the price may fall. Unlike some other investment vehicles, investors can not lose more than their initial investment. Preferred Stock
Like common stock, preferred stock is sold by companies and is then traded among investors on the secondary market. Preferred stock is less risky than common stock, therefore investors can expect less reward. In many ways preferred stock works like bonds. While bonds guarantee regular interest payments, preferred stock guarantees regular dividend payments for a specified time. Preferred stock price is less volatile than common, and virtually eliminates the possibility of large capital gains. Preferred stock is rated in a similar fashion to bonds as well. Standard & Poor's ratings range from AAA (best) down to D (worst). These ratings help investors make judgments as to whether the underlying company will be able to pay dividends. Should the company default on dividends and declare bankruptcy, preferred stock holders are entitled to assets before common stock holders. The bottom line is that preferred stock is less risky than common stock. It's designed to provide an income generating opportunity for investors while raising capital for the underlying company. As Buck investors, we probably shouldn't be thinking about preferred stock until we approach retirement in 30 years, but it's good to know the difference.
Please join StudyMode to read the full document