Common or Preferred Stocks?

Common and preferred stocks are the two types of stocks. Which one to choose between them? Look at their features and decide for yourself!

All publicly traded companies issue common stocks and some others issue preferred too. In terms of losses, you could say that preferred stock exposes you much less to the risk than common stock. But, at the same time it does give you much less potential for capital gains and the dividends which you can receive from your investment. When you own common stocks, you will definitely feel the ups and downs of the company as the share price would rise or fall continuously. They are affected by the investor demand and the sale in the markets. The share price can even possibly triple, but also lose at value. It is possible that the issuer of the common stocks pay dividends. But it is not required to do so. This means that the dividends are not guaranteed and the company can even cut or limit the dividends. However, that would be a rare scenario as it would send a wrong message about the company’s financial outlook.

When you are a holder of preferred stocks, you are usually guaranteed the dividend payments. More importantly, the dividends are paid out before the dividends of the common stock holders. In comparison to common stock, the price of preferred stock does not move as much. Something interesting to look at is that when a company goes bankrupt, the priorities and obligations go first to the preferred stock holders before the common stock holders.

So, in a very basic way, you could say that if you are in search of capital gains, then you should go for a common stock. But if you prefer dividends, then preferred stock is for you. The age of a person also may help him/her to decide which stock to go for. For instance, a person is around 30 years old and is looking for a stock to hold till his/her age of 60. In this case, since the person wants to buy and hold the stock for so long, it would be recommended that he goes for common stock as he will experience a larger gain during his capital gains. Buying preferred stock would apply more to the person if he/she was already 60 years old and was looking to live on passive income. In this case, the dividends could become the passive income.

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