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But we frequently hear the same question from our readers: What's the difference between preferred stock vs. common stock?
Here's a breakdown of the two types of securities…
Preferred stock – sometimes called "preferreds" – trades on a stock exchange but is more like a bond in that it provides a higher fixed-dividend payment than its common stock counterpart. These shares are geared more toward fixed-income potential than price appreciation.
They're "preferred" because they're entitled to more of a company's assets and earnings than common stock.
The fixed nature of the dividend makes preferred stocks very attractive for income-oriented investors who want moderate risk. Like bonds, preferred stock value is inversely proportional to interest rates – one rises when the other decreases.
Shares of preferred stock are much less volatile than common stock because they come with higher and more regular dividends. During the 2008 financial crisis, for example, the largest preferred stock ETF, the iShares S&P U.S. Preferred Stock Index Fund (NYSE Arca: PFF), lost about two-thirds as much as the S&P 500.
Additionally, companies must always pay assets and dividends to preferred stockholders first, since preferred shares are more expensive. If the company happens to go bankrupt, preferred stockholders are more likely to get their money back, whereas common stockholders would lose their entire investment.
Common stock, on the other hand, is the most popular type of investment and makes up the majority of traded securities. Common shareholders are able to vote on important decisions for the company, including approving mergers and electing board members.
The most notable quality of common stock is that it provides appreciation or depreciation through the growth of a company's value. This characteristic can yield higher rewards than preferred stock but also comes at a higher risk.
If the company's stock declines in value, you could lose your entire principal investment. Even worse, if that company goes bankrupt, common stockholders are the last in line to receive money behind creditors and preferred stockholders.
Now that we know the difference between preferred stock vs. common stock, the biggest question is which type is best for your portfolio.