What is the difference between common stock vs. preferred stock?


Quick Answer

Preferred stock is generally considered a hybrid investment that combines the features of a stock and a bond. Preferred shares typically receive a guaranteed dividend payment and have a senior claim over common stocks on the assets of a company in the event of bankruptcy.

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Full Answer

Since preferred stocks function more like bonds and are purchased primarily for the income they produce, they do not normally experience large fluctuations in share value. Common stocks possess much greater potential to generate capital gains because the value of common stocks can rise and fall dramatically based on the anticipated future earnings of a company. In contrast, preferred shares are expected to pay a set dividend regardless of performance.

While preferred shares are superior to common when it comes to the payment of dividends and the return of principal in the event of default, they are subordinate to the claims of bond holders. Owners of preferred stock may or may not possess voting rights. While cumulative preferred shares guarantee that accumulated dividends are paid to preferred shareholders before a dividend is paid to common stock owners, noncumulative shares offer no such assurance. Since convertible preferred stock offers the right to convert shares into common stock, convertible preferred shares are likely to appreciate in tandem with an upward move in the common stock of a company.

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