Common stock represents a piece of ownership in a company and the majority of stock is in this form. When people usually mention stock, they are referring to the common stocks.

Preferred stock, which also represents a piece of ownership, is different from common stock in a few ways. Here are few of the major differences -

  • Common stock comes with voting rights while preferred stock does not. So the owners of common stock get to vote on any major corporate decision or elect the board of directors.

  • Preferred stock can be converted to a fixed number of common stock but the common stock does not have this option. We will talk more about conversion in a future post.

  • Owners of preferred stock have a priority over others. In case of a liquidation, these owners have a higher priority over company’s assets as compared to other stakeholders.

  • Owners of preferred stock are usually paid out a fixed dividend which is based on a par value (similar to bonds). On the other hand, the common stock has variable dividends declared by the board and directors and is not always given.

  • Preferred stock can also have a callable feature that allows the company to redeem the share after a pre-determined time period. This is useful in the case you have a 7% preferred share but can now offer 5% since the interest rates or the yields of preferred stock has dropped. So the company or the issuer can call in the more expensive preferred stock and issue lower dividend ones. (Referred as callable preferred stock)