Similarities Between Common Stock & Preferred Stock

Stocks are the way companies raise money. Instead of going into debt to finance new ventures, companies sell part of their wealth (stock) in the form of shares of stock--each share represents a fraction of the worth of the company. Not all stocks are the same. Some stocks pay dividends regularly, some stocks only increase and decrease in value as the value of the company goes up and down.

Probably the most interesting thing about stocks for most people is the fact that they have almost always been the best place to invest your money--in the sense of getting the most return for your dollar. Stocks consistently have better returns on investment (ROI) than other financial instruments such as bonds, treasury bills, certificates of deposit or mutual funds. This is true of both common stocks and preferred stocks. Both kinds of stocks may pay regular dividends and both kinds may be "growth stocks" that do not pay dividends, but simply grow or decline in value as the company increases or decreases in net worth.

Probably the most negative thing about stocks for most people is the fact that you could lose all the money you have invested. This is true of both common and preferred stocks. If the company goes under, your stocks (common or preferred) become worthless. High returns means high risk.

Preferred stocks are only somewhat safer--if the company goes under, all the preferred stockholders are paid before any of the common stockholders are paid. If there is not enough money, it is the common stockholders that are left out in the cold. As long as everything is going well, common and preferred stocks are not so different.

Stocks (common and preferred) are more than investments--they are also ownership in a company. A stock holder has a say in how a company is run--including the hiring and firing of the people who run the company. Of course you need a lot of stock to be able to exert a lot of influence. The percentage of ownership that a single share of stock represents depends on the stock.

At the time the stock was originally offered, the company decided what percent each share represented. Later, when stock prices go up, stock often "splits" so share holders immediately have twice as many shares, but each share is worth half as much. Only corporations can issue stocks--single ownership businesses or unincorporated, group-owned businesses cannot.

Preferred stocks are the hardest kind to get. They are usually owned by company founders and people who invested money in the company when it was just starting. Preferred stocks often pay the highest dividends and the dividends are often guaranteed--making preferred stocks more like bonds. Both common and preferred stocks may pay dividends and there are some stocks where neither common or preferred stocks pay dividends. With dividends, as with so many things, common and preferred stocks are often very similar.