Common Stock vs. Preferred Stock: The Differences Investors Should Know About

investing 101 written on chalk board

How different is common stock vs. preferred stock? And does it really make a difference when it comes to the value of your investments?

Common stock vs. preferred stock. How different are they in reality? Are we talking apples vs. pears? Or is it more like apples vs. mangoes? Perhaps they’re even further apart, like apples vs. those inedible plastic-y candies that come out around Halloween every year.

Fruit and candy comparisons aside, common stock shares and preferred stock shares have a few things in common. There are also some pretty significant differences. But don’t let the names fool you when it comes to common stock vs. preferred stock. They both come with distinct advantages and drawbacks. Like so many situations with investing, which one is better is an individual choice. 

How to Invest in Stocks

You know you can do it. But how?

The current stock market is creating huge opportunities to invest - even during a pandemic. And unless you majored in finance or are a stock broker yourself, you may not feel confident enough to start investing on your own.

This free report aims to give you the confidence - and the right know-how - to dive right into the stock market. We'll show you how.

Download it today, FREE when you sign up for our complimentary Cabot Wealth Daily advisory!

Don't be left out!


What is common stock vs. preferred stock?

For the most part, when investors talk about stocks, the assumption is that those are common stocks. The price of your shares can increase or decrease in value. You may or may not get a dividend, and if you do, that dividend could increase or decrease. You also get voting rights in that company, which some investors consider an essential part of holding common stocks. For most investors, however, the appeal of common stocks is that as an investment, the value could increase exponentially. 

Preferred stocks are a special class of shares that are traded like stocks but represent debt, like a bond or loan. They do not represent or confer ownership, and the distributions rarely go up. So you’d only buy a preferred for steady income, not capital gains. 

That said, preferred stocks can generate very steady income. The yields are usually between 4% and 8%. And preferred shareholders are generally better protected—both in and out of bankruptcy—than common stock holders. Preferred shareholders are first in line for dividends, and, in the event of bankruptcy, they are more likely to be repaid since the preferred shares are technically a loan. 

One nice benefit to preferred stocks is that the dividends are cumulative. So if a company doesn’t pay the entire dividend in one quarter, they make up the difference in the next quarter. If you have a two-dollar-per-share dividend, that dividend is guaranteed, even if it means you get $1.50 this quarter and $2.50 the next. 

Of course, not every company offers preferred shares. If you’re interested in preferred stocks, most trading platforms provide a search function that will help you find them. Be aware, however, that when you’re looking at common stock vs. preferred stock, the symbols are nearly identical. 

For example, Entergy New Orleans, LLC preferred stock symbol is ENO, while their common stock symbol is ENJ. And to make it further confusing, there’s also Entergy Corp, with the symbol ETR. Other companies have symbols with an additional letter added on. For instance, UMH Properties Inc is listed as UMH, and their preferred stock is UMH-D

The point of all that is to be aware and look closely at what you are buying or selling. 

Which stock is better?

When it comes to common stock vs. preferred stock, we have to look beyond the question of which one is a better investment. The key is that they are different investments. One of them may indeed be better for your portfolio.

Preferred shares come with lower risk, but also with a lower potential for big gains. If you want a steady, relatively assured dividend income, go for the preferred stock. Common shares do carry more risk, but you could get the kind of returns that investors dream about. There’s also no rule that says you can’t have both in your portfolio. 

Whether you want preferred shares, common shares, or both, look through the information here on our website, or sign up for one (or all) of our 15 investment advisories

Do you hold any preferred shares in your portfolio? What do you like or dislike about them?

Comments

  • Rick S.

    “One nice benefit to preferred stocks is that the dividends are cumulative.”

    My understanding/experience is that some preferreds are cumulative, some not.

You must be logged in to post a comment.