In the business of investing, especially if you will be dealing with stocks, you must know their types and what exactly will they do to your money. This way, you can keep your options open, as to what kind of stock would work better for you. But first, let’s first handle their definition, then allow me to break down their differences to you so you have a better understanding of them.
Let’s start with preferred stock. Anyone who holds it gets a fixed dividend. If a company is making more than its assets than their common stock, then they belong to this class. The dividends should be paid out from its preferred shares before dividends to common shareholders. Note that shares of this one has nothing to do with a stockholder’s voting rights.
Now, I’m not talking about one gets to vote who in the next presidential election. This is about who gets a say from decisions regarding the corporate rules and regulations to who gets to be a part of the board. Basically, if there are any major changes in a corporation, stockholders have the right to have a vote on it, otherwise, changes can’t be made.
This stock has all the features of debts, which also helps in paying fixed dividends and even equities. Preferred stocks could have a higher value just because of those things that it could do to a stockholder’s investment.
I would like to say that if you are a stockholder in this kind of stock, you are someone of priority compared to those who belong to the class of common stockholders in the area of dividends. The advantage of this one is that its stocks get a lot of yields than the other one and stockholders can get their shares on a monthly basis and even quarterly (depends on the voting of course).
If you are wondering how do they fix the dividends? Well, the basis is through a benchmark interest. This is a good option because supposed a company is starting to go downhill, shareholders on this stock could get their payment in arrears before common shareholders can get theirs. They might not get it in cash, but they would still be able to get it accumulatively.
Let us now talk about the common stock. Basically, it is the money or fund that a corporation has.
The people who own it are generally under the management of the board. If you are a common stockholder, then keep in mind that you are not the priority when it comes to exactly owning funds in the corporation. But don’t get me wrong, you still have your rights to your investment in the company when it is time for liquidation, BUT only after other stockholders superior to you are completely paid.
Now, that you know about these two, you can now decide what type of a stockholder would you rather be. I’ll be glad to walk you through other finer details about being a stockholder if you stay tuned.