Stocks are sometimes a scary subject for those not in the finance industry. Here is a brief lesson on the difference between preferred and common stock.
Common stock is issued to investors who have a wide range of investment goals, whether it is to be a bit more conservative or to watch it (hopefully) grow. Those who hold common stock in a company have what is known as a voting ownership in the company. In the event that the company is successful and profitable, the common stockholder is entitled to this success in the form of dividends or capital appreciation. However, common stockholders are last in line after preferred stockholders and debt holders, when it comes to reaping the company's benefits. These common stockholders usually get one vote for each share of the company that they own. They are allowed to vote in such matters as choosing the board of directors of the company and streamlining the company's objectives. Normally, common stockholders also have what is known as preemptive rights. In layman's terms, if the company decides to issue another batch of stock, the common stockholders have a right to continue their current percentage of "ownership" by buying a chunk of the new stock. For example, if Jack currently owns 1000 shares of the company's 100,000 shares, then he owns 1% of the company. Should the company decide to issue another 100,000 shares, in order to maintain his 1% ownership of the company, Jack would be given the "right" to buy 1000 more shares.
Preferred stock is another option. Usually, those who own preferred stock in a company are officers of the actual company, board members and wealthy investors. As mentioned earlier, when a company has a successful quarter or year and wants to distribute this profit, it is usually done in the form of dividends. Preferred stockholders always have the edge in this instance, as they are always paid before the common stockholder. On the flip side, if a company is not quite as successful and becomes insolvent, the assets are again always distributed to preferred stockholders before the common stockholder. Because preferred stockholders are paid before the common stockholder, the dividends are normally a bit larger than the dividends paid to common stockholders. Also, these dividends are paid out at assigned intervals, thus making them more of a fixed-income for investors. These dividends are also, most times, guaranteed so if for some reason the dividends are not paid out one quarter, the preferred stockholder will receive two quarters worth of dividends the next quarter.
