What is the difference between preferred stock and common stock?

The number one noted difference between preferred stocks and common stocks is that the former can receive a much larger share with regards to the corporation's resources and income, whereas the latter have a smaller claim. This usually happens when the company is doing a good job at managing its business and it has extra money and resolves to give an incentive commonly called dividends to their stockholders. In paying dividends, where the income is divided among stockholders, holders of preferred stocks are the first priority followed by holders of common stocks, when payment is made.

But it is important to note, that this priority is very vital during moments where the company is suffering bankruptcy and claims are made. In this situation, holders of common stocks are the final claimant to the company's holdings and properties. In layman's term, when the corporation is ordered to dissolve and answer it's obligations to creditors, holders of common stocks will only obtain payment when the payment of claim preferred shareholders are made.

The number two noted difference is that, with regards to the payment of dividends on holders of preferred stocks is not the same and more than the dividends received by common stockholders. In purchasing a preferred stock, there is predictability on the date you will receive your share of the profits due to the fact that payments are made on the date specified on the stocks at standard periods. With regards to holders of common stock, they can only receive their share of the profits when the corporation's board of directors make a final decision to disburse dividend or not.

Due to this feature on preferred stock, it can be considered that the said stock is not affected by volatility commonly found with common stocks, which is market driven, thus preferred stocks can be categorized "as a fixed-income security". In addition to the said category of preferred stock is the reality that the dividends are always assured, which means that if the corporation will fail to pay the dividends, the main requisite is that they are obligated to pay on the preferred stock prior to "any future dividends are paid on either stock. " In conclusion: the main idea on a preferred stock is that it has a feature of security with an added element relating to a middle ground as a bond and a common stock.

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