What’s the Difference between a Common stock and Preferred Stock?

I attended a seminar and my seat mate asked me that question. I was about to answer him, but the seminar resumed from break.

I rarely received questions regarding investing. Why? Because based on the data, only less than 1% of the Filipino population actually invest in stocks, mutual funds, etc. Majority of Filipinos place their money in bank deposits, which earn a measly 0.375% per year.

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Let me answer now the question,

What’s the Difference between a Common stock and Preferred Stock? 

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Common stocks are the most popular and the type that we trade in the stock market and It refers to an ownership in a company. 

Investors earn in two ways:

-Price appreciation

-Dividends

Investors who have common shares have voting power.

Major Risk: if its prices fall, you may lose everything that you invested in.

The disadvantage of being a common shareholder is that you are the last to receive claims on earnings and assets of a company should it go bankrupt.

A common shareholder will only be paid after all the preferred shareholders and creditors are paid first.

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Preferred stocks 

These are sold by companies and then traded among investors in the secondary market

Preferred shares are less risky than common stock that’s why its returns are not as high as compared with common shares.

Advantages in holding preferred shares:

1) Preferred stockholders are the first to receive dividends and overdue debts before common shareholders receive theirs.

2) Fixed dividends that yield more than common dividends are issued to preferred shareholders.

3) If a company becomes bankrupt and liquidation of assets are about to occur, preferred shareholders receive any cash left before common shareholders receive any money.

Disadvantages of preferred shares:

1) Preferred shareholders received the same fixed dividends even if the company earns more profits.

2) Investors who have preferred shares don’t have voting power.

We need to invest in knowledge first and make sure we understand where we put our money in. Reading blogs, asking mentors is very important and it will leap our knowledge big time.

Subscribe now to my blog Super OFW Investor and feel free to share and comment below.

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Nolan Lazaro
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