While common and preferred stocks have many similarities, there are numerous differentiating factors which must be fully understood before making any form of investment. Perhaps the most significant difference between common and preferred stocks, according to capital procurement specialist Jeffery Steven Stone, is that common stock typically comes with voting privileges, where often preferred stock does not.
“While both common and preferred stocks represent a slice of ownership in an organization, it’s important that new investors, in particular, understand the key differences,” Stone suggests.
Referring back to voting privileges, the capital procurement specialist further explains that while circumstances can vary, common stockholders generally receive voting privileges, whereas preferred stockholders typically do not. “This will depend largely on decisions made by an organization’s board of directors,” he adds.
Another key differentiating factor, according to Stone, relates to cases of insolvency. “If this happens,” he explains, “common stockholders will not receive any financial compensation until all preferred stockholders have been paid.”
Other areas of importance, says Stone, are dividends, hybrid security, and the conversion of stocks.
Of dividends, he explains that preferred stocks are largely deemed superior to common stocks in this respect. “Preferred stockholders are paid regular dividends at set intervals, whereas this is not the case for common stocks, where no dividends may be paid at all,” reveals Stone.
As a result, preferred stock is typically less volatile than common stock.
Preferred stock also enjoys certain bond-like characteristics, sometimes called hybrid security. Common stock lacks much of this security, and instead, values are primarily determined by supply and demand. “For the most part,” says Stone, “preferred stocks are much less volatile and tend to fluctuate less, although as with any investment, there’s always a chance of volatility, and with it, losing money.”
Lastly, with respect to convertible variables, Stone explains that preferred stock can be converted into common stock, but the same is not true in reverse. “This gives some flexibility to preferred stockholders, but the same is not true for common stockholders, or preferred stockholders who have subsequently converted to common stocks,” he adds.
“Ultimately,” says Stone, wrapping up, “it’s about deciding what works best for you personally, and investing accordingly.”
Jeffery Steven Stone is a managing partner at New York City-based Eurasian Capital, LLC, responsible for trading the firm’s proprietary capital. Further to overseeing the organization’s selection analysis and daily investment affairs, principal activities entail utilizing a platform of hedging strategies. These include quantitative-driven swing trading, covered call writing, and pair trading activity.