Take Stock of Your Investments: Preferred Stock vs. Common Stock

Are your investments in common stock or preferred stock? It’s important to know what these types of stocks are and to understand what roles they can serve in your investment portfolio. The difference between common and preferred stock impacts how you make money. 

Companies generally issue common and preferred stock shares as a way to finance growth and expansion. Investors buy and trade these stocks. When you invest in either type of stock, you own a part of the company that issues it. 

Preferred and common stock are the two types that are issued most often. But there are some big differences between them. When you’re thinking about purchasing preferred shares vs. common shares, you’ll want to understand the pros and cons of each type.

What Is Common Stock?

Common stock is the type you’ll see most often. When you buy shares in a company’s common stock, you are entitled to a portion of the company's profits. 

Earnings 

Profit potential tends to come from capital appreciation, which is an increase in the share value. For example, if you buy a share at $20 and the stock price climbs to $25, the $5 is capital appreciation. If you then sell the stock, you earn $5 in capital gains.

Profits could also come in dividends, which are a percent of the company's earnings that are usually paid quarterly or yearly. Dividends can be cash or additional shares. The company’s board of directors decides how much to pay in dividends for common stock.

Pros and Cons

If you own common stock, you usually have the right to vote on certain corporate actions. Your vote counts in proportion to the number of common shares you own. If a company issues more stock, you have the right to buy more stock, so you can maintain your level of ownership in the company.

The value of common stock can go up or down based on the company’s performance, changes in the economy and other factors. Common stocks could lose value over time, so you might lose money investing in them. Additionally, dividends are not guaranteed. If you’re thinking about investing in common stock, you’ll want to be sure you can handle the risk that’s involved. 

What Is Preferred Stock?

Preferred stock is a type of stock that can seem like a blend of common stocks and bonds. Not all companies offer preferred stock. It’s often issued by financial institutions, telecommunication providers and utility and energy companies. 

Earnings

Preferred stockholders have the right to be paid dividends first, before common stockholders. Dividend payouts are usually higher and are made on a regular schedule for a set period of time, like bonds.

Pros and Cons 

Preferred stock tends to have lower capital appreciation and doesn’t come with voting rights. This type of stock is considered more stable than common stock and get better payouts if the company goes bankrupt.

Companies can buy back shares of preferred stock at any time and for any reason. If a company decides to buy back shares, shareholders usually get a good price for them. 

If you own preferred stock, you may be able to convert it to common stock, but you can’t convert common stock to preferred stock.

You may be interested in preferred stock if you would rather reduce your risk in exchange for potentially lower payouts. 

What Should I Have in My Portfolio?

The types of investments you should have depend on your age, goals, financial situation, risk tolerance, reasons for investing and other factors. There’s no one-size-fits-all answer for everyone. You may need to adjust your investment mix as you get older, revise your goals or have changes in your life, family or career.

A Farm Bureau financial advisor can review your income, budget, portfolio and goals. Together, you can build a financial plan that works for you.