Common stock vs Preferred stock

Difference Between Common stock vs Preferred stock

Common Stock is popularly known as the Equity capital of a company, is the invested contribution from the primary shareholders of a particular company. Equity holders are an owner of the company and are entitled to bear the profit and loss of a Company afterall the dividends and Debts are paid off. On the other hand, Preferred Stockholders are also the Investors of the company and also falls under the category of owners, but with certain added benefits in comparison with the Equity Shareholders.

Let us study much more about Common stock vs Preferred stock in detail:

• A Common Equity shareholder enjoy dividends in case there is a profit from the business. In case the business doing exceedingly well, the share price of the Equity shareholders generally moves towards the north, providing handsome gains to the Net-worth of the Investors. Preference shareholders also enjoy the same benefits but get preference over the Equity shareholders.
• Preferences such as they receive a fixed amount of interest irrespective of the situation of the business, unlike Equity shareholders. Equity shareholders get on the other hand enjoys voting power, unlike Preferred shareholders. The loss is primarily borne by the Equity shareholders and in case of insolvency Preferred stockholders has the right to claim for the Assets of the company. The price appreciation in the Stock exchange is also applicable for Preferred shares also.
• In the case of Dividends, the Preferred Shareholders are entitled to a fixed rate of Dividends even if the company’s profitability is in a stake. However, in the case of strong profitability, the Preference shareholders are entitled to a fixed rate of Dividend. But the Common shareholders or the Equity shareholders are entitled to a higher rate of dividend as it is decided by the Board of Directors of the company in AGM.
• One of the primary differences between Common stock vs Preferred stock shareholders is that the Common shareholders enjoy voting right during an election of Directors of the Company. But the Preference share does not have the right to vote for the Director Recruitment. Thus, the characteristics of preference shareholders have common features of both Bond/ Debenture holders and Equity Shareholders. They are the owners of the company and enjoy a fixed rate of return on the capital invested in the company.
• In case the Bond interest rate falls, the rate of interest of the Preference share looks very attractive. Certain tax advantages are enjoyed by the Preference shareholders, unlike Equity Shareholders. From the company’s point of view, Preference shareholders are familiar when there is some restriction while taking extra funds is required for the Company to running its operations, expanding its manufacturing capacity, meet the working capital requirements, etc.

Common stock vs Preferred stock Infographics

Below is the top 6 difference between Common stock vs Preferred stock

Key Differences between Common stock vs Preferred stock:

Both Common stock vs Preferred stock are popular choices in the market; let us discuss some of the major Difference Between Common stock vs Preferred stock:

1. A Business may or may not have Preference shareholders but the Equity shareholders are an integral part of the Company. Primarily they are the promoters of the company.
2. Preference shareholders are issued when there has been borrowing limitations and the management decides to maintain a healthy D/E ratio. However, the Equity shareholders remain and enjoy their voting rights sometimes preference shareholders could be converted into Equity shareholders.
3. Dividends are fixed in the case of Equity shareholders whereas dividend depends upon the profitability of the company.
4. Preference shareholders can claim them after Assets selling during winding up of the Business. Whereas, the Equity shareholders have to wait until all the dues are meant.

Head To Head Comparison between Common stock vs Preferred stock:

Below is the topmost comparison between Common stock vs Preferred stock

Final Thoughts

Both Common stock vs Preferred stock constitutes the share capital of a company, and they are the real owners of the company. In most of the days, the importance of Preference shareholders is diminishing and there are not many companies who use Preference share capital for the Business. Equity share is an integral part of the business whereas Preference shares are issued to get certain tax benefits or due to certain Debt restructuring of the company. Income cases when the borrowings become high, the Debt to Equity ratio doesn’t become favorable, thus the Preference share capital is infused to CAPEX expansion, working capital needs, payment of any related party etc.

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