When a company needs to raise capital, it can do so by issuing various types of securities, including common stock and preferred stock. In this article, we’ll take a closer look at common stock, including what it is, the different types, and how it compares to preferred stock.

What is Common Stock?

Common stock is a type of security that represents ownership in a company. When an investor purchases common stock, they are buying a share of the company and become a partial owner. As a shareholder, they have the right to vote on certain matters, such as electing the board of directors, approving major corporate actions, and approving the company’s financial statements.

In addition to voting rights, common stockholders may also receive dividends, which are a portion of the company’s profits that are distributed to shareholders. However, unlike preferred stockholders, common stockholders do not have a guaranteed dividend and may not receive any payments if the company does not generate profits.

Different Types of Common Stock

There are two main types of common stock: voting stock and non-voting stock. Voting stock gives shareholders the right to vote on matters such as electing the board of directors, approving major corporate actions, and approving the company’s financial statements. Non-voting stock, on the other hand, does not provide voting rights.

Some companies may also issue multiple classes of common stock, with each class having different voting rights and dividend payouts. For example, a company may issue Class A common stock with one vote per share and Class B common stock with 10 votes per share.

Preferred Stock vs. Common Stock

While both preferred stock and common stock represent ownership in a company, there are some key differences between the two. Preferred stockholders have priority over common stockholders when it comes to receiving dividends and getting paid in the event of a liquidation. This means that if a company has to liquidate its assets, preferred stockholders will be paid before common stockholders.

Preferred stockholders also do not have voting rights, but they may have other rights, such as the right to convert their shares into common stock or the right to call their shares back from the company at a certain price.

Another key difference between preferred stock and common stock is the way dividends are paid. Preferred stock dividends are typically fixed and paid out before common stock dividends. Common stock dividends, on the other hand, are not guaranteed and can fluctuate based on the company’s profitability.

Which is Better: Common Stock or Preferred Stock?

The decision of whether to invest in common stock or preferred stock ultimately depends on the investor’s goals and risk tolerance. Common stock tends to be more volatile and carries more risk, but it also offers the potential for higher returns. Preferred stock, on the other hand, is generally considered to be less risky and provides a more predictable stream of income.

Investors who are looking for long-term growth and are comfortable with taking on more risk may prefer common stock. Those who are looking for a steady stream of income and want to prioritize capital preservation may prefer preferred stock.

Final Thoughts

Common stock is a type of security that represents ownership in a company. As a shareholder, investors have the right to vote on certain matters and may receive dividends if the company generates profits. There are different types of common stock, including voting and non-voting stock, and some companies may issue multiple classes of common stock with different rights and dividend payouts.

While common stock and preferred stock both represent ownership in a company, there are some key differences between the two. Preferred stockholders have priority over common stockholders when it comes to receiving dividends and getting paid in the event of a liquidation. Investors should consider their goals and risk tolerance when deciding whether to invest in common stock or preferred stock.