Is Common Stock A Better Investment Than Preferred Stock?

Is Common Stock A Better Investment Than Preferred Stock?

by Jun 6, 2019Investments

Investing in stocks is a great way to build your wealth, save for retirement, and even generate an income after you do retire. But choosing the right stocks to invest in can be very tricky. You also should know which type of stock you want to buy before making an investment. In general, the two types of stock issued by public companies are called preferred stock and common stock.

While both preferred and common stock are purchased as shares and indicate (partial) ownership of a public company, they function very differently.

Preferred Stock

Preferred stock is a sort of hybrid between common stock and a bond. Like common stock, preferred stocks can pay dividends. The difference is that preferred stock will pay an agreed-upon dividend at regular intervals (similar to a bond). Preferred stock dividends are also typically higher than those of common stock.

Also, like bonds, preferred stocks will return your original investment if you hold them until maturity. In most cases, the maturity date will be thirty to forty years from the date of issue.

The most significant difference between preferred and common stock is that preferred shares do not give owners voting rights in the company. While that may not sound like a big deal for the average investor who may only buy a few hundred or thousand shares, it’s a huge deal for investment funds and institutional investors who stand to lose a lot of money if the company is run into the ground.

Common Stock

Common stock, as the name suggests, is the type of stock most people invest in. Common stock confers voting rights to those who own it and typically outperforms preferred shares on the open market.

Regarding dividends, a company’s board of directors will decide whether or not to pay out a dividend to common stockholders. If the company misses a dividend, common stockholders get bumped behind preferred stockholders, meaning they get paid last (or not at all in some cases).

Common stock does not share any elements with a bond, and therefore does not come with a maturity date to redeem your initial investment. While common stock represents the highest potential for gains, it also comes with the most volatility and risk.

Which Is A Better Investment?

Generally speaking, common stocks are a better investment earlier in life when you’re trying to build your wealth. Preferred stock is often a good choice for those who are at the tail-end of their careers or have already retired and want an additional source of income.

There’s also nothing wrong with having some of both types of stock in your portfolio. If you’re unsure which type of stock is right for you, your best bet is to speak with an experienced financial planner who can help evaluate your current life goals and create an investment plan to help you achieve them.

To learn more about creating a stock portfolio and how to achieve your goals with a structured financial plan, please contact us today.

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