When someone acquires ownership of a company; usually through investing, they may be able to choose which type of stock they receive.
There are two different types of stock, preferred or common; sometimes referred to as ordinary stock. There are only a couple of differences between the two however, the biggest difference is voting rights.
What is common stock?
Common stock is the type of stock you will see most throughout the investing and business world however, it is useful to understand both types.
Owning common stock means you have ownership rights as well as voting rights; this means if a decision needs to be made your opinion will be taken into account relative to the percentage of the company you own therefore, the more stock you own the more influence you have. For example if you own 20% of a company your decision will account for 20% of the overall decision made. You could override someone elses vote if they own less of the company than you do (like a shareholder will only 15% of the company although, if they and another shareholder with 10% agree their vote totals 25%, which would be a stronger opinion than your own as you only own 20%. Any big decisions made in a company will always follow the majority.
What is preferred stock?
In the same example if you owned 20% of the company but as preferred stock, you would still be entitled to ownership rights but would not have any voting rights. This means your opinion in a big decision the company has to make wouldn’t count for anything. Preferred stock also has the ability to be converted into common stock whilst common stock cannot be converted into preferred stock.
Why would you want to own preferred stock?
Whilst not having any voting rights in a company, may not seem like a good thing, it does mean you don’t have to worry about making any decisions in the company you own. If you are an investor for example, who owns stakes in multiple different companies, you may struggle to find the time to manage and make decisions for each company. Owning preferred stock allows you to still take a percentage of profits whilst not having to worry about running the business or making any big decisions.
Preferred stock owners are also paid any dividends before common stockholders and in some cases the dividend amount that preferred stockholders receive can be more (per share) than common stockholders since preferred stockholders divided amounts are fixed and do not change. This does mean however if a stock price rises and in turn the dividend amount does, common stockholders will see a rise in the dividend amount they receive whilst preferred stockholders will still only receive their fixed dividend amount. Note that not every company pays out a dividend.
Which is the best one to choose?
Choosing the right type of stock to own is dependent on your situation. In most cases, if your only interest in owning stock is for financial gain, you may not be interested in making any decision within the company you own, therefore preferred stock may be the right choice, baring in mind that if your ownership is less than <1% it may not matter what type of stock you choose since 1% of voting rights in a company will be very small in comparison to any other majority shareholders; which are usually people who own more than 25% of a company at which point they will become a PSC for short or persons of significant control.