What’s the Difference between Common and Preferred Stock?
When the Board of Directors declares a dividend, preferred shareholders are guaranteed a fixed amount of money per share. This means preferred shareholders get the same amount of money each dividend payment. Common shareholders are not guaranteed a fixed amount of money. This means common shareholders could get a different amount of money each dividend payment, which includes not getting a dividend payment at all.
Common shareholders usually have voting rights. This means common shareholders have a say when important decisions are being made about the company. Preferred shareholders usually don’t have voting rights. This means preferred shareholders do not have a voice when important company decisions are being made.
Priority of Payments
Preferred shareholders have a higher priority of payments than common shareholders. This means that when a company goes bankrupt, if there is any money left to pay shareholders after the company has paid its creditors, the company will pay its preferred shareholders first. If there is any money left after paying its preferred shareholders, it will then pay its common shareholders. This means that common shareholders are the last priority of payments.
Common shareholders are in the highest risk position. This means they have the greatest potential for losing money. Preferred shareholders have moderate risk. This means they have the potential to lose money but are less likely to lose as much as common shareholders.
Common shareholders have the highest reward potential. This means they have the potential to make the most amount of money. Preferred shareholders have moderate reward potential. This means they have the potential to make money but usually not as much money as common shareholders can make.