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Common stock vs Preferred stock

Common stock vs Preferred stock

Difference Between Common stock vs Preferred stock

Common Stock is popularly known as Equity capital of a company, is the invested contribution from the primary Shareholders of a particular company. Equity holders are an owner of the company and are entitled to bear the profit and loss of a Company afterall the dividends and Debts are paid off. On the other hand, Preferred Stockholders are also the Investors of the company and also falls under the category of owners, but with certain added benefits in comparison with the Equity Shareholders.

A Common Equity shareholder enjoy dividends in case there is a profit from the business. In case the business doing exceedingly well, the share price of the Equity shareholders generally moves towards the north, providing handsome gains to the Net-worth of the Investors. Preference shareholders also enjoy the same benefits but get preference over the Equity shareholders. Preferences such as they receive a fixed amount of interest irrespective of the situation of the business, unlike Equity shareholders. Equity shareholders get on the other hand enjoys voting power, unlike Preferred shareholders. The loss is primarily borne by the Equity shareholders and in case of insolvency Preferred stockholders has the right to claim for the Assets of the company. The price appreciation in the Stock exchange is also applicable for Preferred shares also.

In the case of Dividends, the Preferred Shareholders are entitled to a fixed rate of Dividends even if the company’s profitability is in a stake. However, in the case of strong profitability, the Preference shareholders are entitled to a fixed rate of Dividend. But the Common shareholders or the Equity shareholders are entitled to a higher rate of dividend as it is decided by the Board of Directors of the company in AGM.

One of the primary difference between Common stock and Preferred stock shareholders is that the Common shareholders enjoy voting right during an election of Directors of the Company. But Preference share does not have the right to vote for the Director Recruitment. Thus, the characteristics of preference shareholders have common features of both Bond/ Debenture holders and Equity Shareholders. They are the owners of the company and enjoys a fixed rate of return on the capital invested in the company. In case the Bond interest rate falls, the rate of interest of Preference share looks very attractive. Certain tax advantages are enjoyed by the Preference shareholders, unlike Equity Shareholders. From the company’s point of view, Preference shareholders are familiar when there is some restriction while taking extra fund is required for the Company for running its operations, expanding its manufacturing capacity, meet working capital requirement etc.

Common stock vs Preferred stock Infographics

Below is the top 6 difference between Common stock vs Preferred stockCommon vs Preferred Stock Infographics

Key Differences between Common stock vs Preferred stock:

Both Common stock vs Preferred stock are popular choices in the market; let us discuss some of the major Difference Between Common stock and Preferred stock:

  1. A Business may or may not have Preference shareholders but the Equity shareholders are an integral part of the Company. Primarily they are the promoters of the company.
  2. Preference shareholders are issued when there has been borrowing limitations and the management decides to maintain a healthy D/E ratio. However, the Equity shareholders remain and enjoy their voting rights sometimes preference shareholders could be converted into Equity shareholders.
  3. Dividends are fixed in the case of Equity shareholders whereas dividend depends upon the profitability of the company.
  4. Preference shareholders can claim them after Assets selling during winding up of the Business. Whereas, the Equity shareholders have to wait until all the dues are meant.

Head To Head Comparison between Common stock vs Preferred stock:

Below is the topmost comparison between Common stock vs Preferred stock

The basis Of Comparison Between Common stock vs Preferred stock Equity Share Preference Share
Related to Related to the investment done by the owners of the company and the return is not guaranteed. Capital held by the owners of a company. Basically represents the capital of the Owners which has a fixed rate of return irrespective of the situation of the business.
Meaning Equity is related to a part of the capital invested in a business without borrowings. Equity capital basically termed as the shareholder’s capital. Preferred capital also includes the in the shareholders capital, but the characteristics are different from Equity. It has both elements of debt.
Voting Right All the Equity shareholders have voting rights; they can participate in the selection of Directors. Preference shareholders do not participate in voting rights as they do not have the right to vote for the Directors.
Calculations Equity shareholders = Assets – (liabilities+ preference shareholders) Preference shareholders = Assets – (liabilities+ equity shareholders)
Risk If the business is not doing well, Equity holders are not entitled to dividends. Equity holder bears the risk of the business and they share both the profit and loss of the Business. Equity shareholders are to receive Dividends. In case of winding up of the business, they have to contribute if the realization of the assets does not meet liabilities. Performance of the company does not matter in case of their rate of return. They are entitled to a fixed rate of return in spite of the business scenario. In case of higher profitability of the company, the Preference share holder’s are not entitled to extra dividends unless it is being approved by the board of Directors.
Winding up of Business Equity holders cannot claim their part unless all the related party, borrowers are paid. Preference shareholders can claim their part before the equity shareholders.

Common stock vs Preferred stock – Final Thoughts

Both Common stock vs Preferred stock constitutes the share capital of a company, and they are the real owners of the company. In most of the days, the importance of Preference shareholders is diminishing and there are not many companies who use Preference share capital for the Business. Equity share is an integral part of the business whereas Preference shares are issued to get certain tax benefits or due to certain Debt restructuring of the company. Income cases when the borrowings become high, the Debt to Equity ratio doesn’t become favorable, thus the Preference share capital is infused to CAPEX expansion, working capital needs, payment of any related party etc.

Recommended Article

This has a been a guide to the top difference between Common stock vs Preferred stock. Here we also discuss the Common stock vs Preferred stock key differences with infographics, and comparison table. You may also have a look at the following articles –

  1. Mutual Funds vs Stocks
  2. Stocks vs Shares – Top Differences
  3. Stock Trading Right for You? Pros and Cons
  4. Bonds vs Stocks- Which One Is Best?

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