What is Common Stock and Preferred Stock?

What is Common Stock and Preferred Stock?
Issuers of equity instruments can structure the rights associated with different classes of stock in any way that meets the needs of the company.
Most common stock gives the owner one vote at shareholders' meetings, although not always. Some preferred stock grants one vote per share, while others provide more, fewer or no voting privileges at all.
Preferred stock is given priority over common stock in the order in which creditors receive money in the event of a bankruptcy. Preferred shareholders receive funds after bondholders, but before common stock holders. Preferred stock also usually pays higher dividends than common stock. Some common stocks pay dividends, while others pay none.

Younger, growing companies start-ups rarely issue dividends. Not paying a dividend does not necessarily reflect poorly on a company. However, abruptly reducing or eliminating a dividend after a long period of paying one can cause increased scrutiny. The dividend yield of a preferred stock is the dollar amount of a dividend divided by the price of the stock. This is often based on the par value before a preferred stock is offered. It's commonly calculated as a percentage of the current market price after it begins trading.

In general, preferred stocks are less volatile than common stocks. However, like all assets in an open market, there have been times when preferred stocks have been volatile and lost value. Preferred stock is more commonly called back by the issuer than common stock, which may also be bought back. Investors buying preferred shares have a real opportunity for these shares to be called back at a redemption rate representing a significant premium over their purchase price. Markets for preferred shares often anticipate call backs and prices may be bid up accordingly.



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