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Difference Between Common and Preferred Stock

When investing in the stock market for the first time, you expect an experienced broker to suggest the best strategy for you. During your introduction, your broker should break down the two types of stock — common and preferred.

Common Stock

Common stock is more familiar to most investors. Investors who purchase common stock have partial ownership of a corporation. Typically, one share equals one vote toward the decision-making of the business. Common stockholders can voice their opinion on the company’s board of directors and other corporate policies.

If investors buy common stock, they may think they can enter the company’s headquarters and demand office space because of their partial ownership of the business. However, that is not how it works. That’s because chairs, computers, and other items inside a corporation are owned by the actual company, which is a legal entity.

Instead, investors own what’s known as a residual claim. That means if the business the investor has stock in goes bankrupt, the investor will have the opportunity to receive any leftover assets after creditors are paid first.

Preferred Stock

Preferred stock is similar to common stock, except that preferred stockholders have a larger claim of dividends than common stockholders. Additionally, preferred stockholders have limited or no voting rights over a business compared to common stockholders. Another difference is that if a company liquefies assets, preferred stockholders can claim more assets than common stockholders.

Preferred stock is comparable to bonds. A bond is like an IOU — when the company provides bonds to help raise money from investors, the business will have to pay back investors after some time. Both preferred stocks and bonds may seem appealing to investors as they allow investors to have more stake in the company than common stockholders.

Concerned About Your Investment?

As shared earlier, when investing, you assume your broker is putting your best interests first. But that’s not always the case.

If your investment has been mismanaged, you have every right to seek justice. The securities arbitration and litigation attorneys at Weltz Law are here to help you. With more than 30 years of collective experience, our nationwide attorneys will fight for you and your investments. Contact us online or by phone to see what we can do for you.