Common Stock vs. Preferred Stock

There are two classes of stock that companies offer: common and preferred. These come with different financial terms and offer different rights in relation to the governance of the company. Here are some of the key differences between these two types of stock and the implications for how each type is used.

Common Stock
The holders of common stock can reap two main benefits from the issuing company: capital appreciation and dividends. Capital appreciation occurs when a stock's value increases over the amount initially paid for it. The stockholder makes a profit when he or she sells the stock at its current market value after capital appreciation.

Dividends, which are taxable payments, are paid to a company's shareholders from its retained or current earnings. Typically, dividends are paid out to stockholders on a quarterly basis. These payments are usually made in the form of cash, but other property or stock can also be given as dividends. Payment of dividends, however, hinges on a company's capacity to grow — or at least maintain — its current or retained earnings. This means that ongoing payment of dividends cannot be guaranteed.

Common stock ownership has the additional benefit of enabling its holders to vote on company issues and in the elections of the organization's leadership team. Usually, one share of common stock equates to one vote.

Preferred Stock
Preferred stock doesn't offer the same potential for profit as common stock, but it's a more stable investment vehicle because it guarantees a regular dividend that isn't directly tied to the market like the price of common stock. This type of stock guarantees dividends, which common stock does not. The price of preferred stock is tied to interest rate levels, and tends to go down if interest rates go up and to increase if interest rates fall.