What is the distinction between common and preferred stocks?

Common and preferred stocks are the two main types of shares that make up the capitalisation of a company. Each type of stock confers different rights and privileges to its holders, and there are a few key differences between them.

Dividends

Dividends are payments made by a company to its shareholders out of its profits.

Firstly, holders of common stock are typically entitled to receive dividends, but the timing and amount of these dividend payments are at the discretion of the company’s board of directors. In contrast, preferred stockholders are often guaranteed a fixed dividend before any dividends are paid to common shareholders.

Voting rights

Common shareholders typically have voting rights in proportion to their ownership stake in the company; therefore, they can vote on matters such as the election of directors and other significant corporate decisions. Preferred shareholders usually do not have voting rights.

Liquidation preferences

If a company is liquidated or sold, ordinary shareholders are typically entitled to receive the proceeds from the sale after creditors and preferred shareholders have been paid. Common shareholders are generally at the bottom of the priority list when receiving payments in a liquidation.

Convertibility

Preferred shares may be convertible into common shares, while common shares are not usually convertible into preferred shares. Preferred stockholders may have the option to convert their shares into common shares at a predetermined price.

Par-Value

Preferred shares often have a par value, the price at which the company can redeem the share, and common shares usually do not have a par value.

Callability

Preferred shares may be called by the company, which means that the company has the right to repurchase the shares from shareholders at a predetermined price. Ordinary shares are not usually callable.

Risk

Ordinary shares are generally considered riskier than preferred ones since they offer less protection to shareholders in the event of financial difficulties. Preferred shares often have a higher credit rating than ordinary shares, which means they are less risky.

Price

The price of common shares is typically more volatile than preferred shares. Therefore, common shares are more likely to experience sharp price changes, both up and down.

Taxes

Dividends paid on common shares are typically subject to taxation, while dividends paid on preferred shares may be tax-exempt. Your preferred shares must meet specific criteria, such as being listed on a stock exchange to be exempt from tax.

Minimum investment

There is usually no minimum investment required for ordinary shares, while preferred shares often have a minimum investment requirement. The minimum investment required for preferred stocks in the UK is £100.

How to invest in stocks

Determine your investment goals

The first step to investing in stocks is to determine your investment goals. Are you looking to invest for the long term or the short term? What level of risk are you willing to take? How much money are you willing to invest? Answering these questions will help you choose the right type of stock for your portfolio.

Choose a broker

The next step is to choose a broker. A broker is an intermediary buying and selling stocks on your behalf. Several brokers are available, so it’s essential to compare their fees and services before choosing one.

Open an account

Once you’ve chosen a broker, you’ll need to open an account with them. It is usually a simple process that can be done online.

Research stocks

Once you have an account set up, you can start researching stocks. It’s important to research a stock before investing to know what you’re buying and the risks.

Buy stocks

Once you’ve chosen the stocks you want to invest in, you can buy them through your broker. You will need to supply your broker with basic information, such as the stock ticker and the number of shares you want to buy.

Monitor your investment

After you’ve bought your stocks, monitor your investment and ensure that the stock price doesn’t fall too low. You can do this by setting up price alerts with your broker. Navigate here to start trading stocks.