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Difference Between Common Stock vs Preferred Stock

Let’s look at the differences between equity instruments, common stock, vs preferred stock. The invested contributions made by primary shareholders are known as Common Stock, which is popularly referred to as the Equity capital of a company. After all the dividends and debts are paid off, the equity holders bear the profit and loss of a company and are considered the company’s owners. On the other hand, Preferred Stockholders are also the company’s investors and fall under the owner’s category, but with certain added benefits compared with Equity Shareholders.

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A Common Equity shareholder enjoys dividends if there is a profit from the business. If the company is 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 equity shareholders.

Preferences, such as they receive a fixed amount of interest irrespective of the business situation, unlike Equity shareholders. Equity shareholders get, on the other hand, enjoy voting power, unlike Preferred shareholders. The Equity shareholders primarily bear the loss, and Preferred stockholders have the right to claim the company’s assets in case of insolvency. The price appreciation in the Stock exchange is also applicable for Preferred shares.

The Preferred Shareholders are entitled to a fixed rate of Dividends in the case of Dividends, even if the company’s profitability is at stake. However, if there is strong profitability, the Preference shareholders are entitled to a fixed rate of Dividends. The company’s Board of Directors decides on the higher dividend rate entitled to the Common or Equity shareholders in the 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 with both Bond/ Debenture holders and Equity Shareholders. They are the company’s owners and enjoy a fixed rate of return on the capital invested in the company.

Head To Head Comparison Between Common Stock vs Preferred Stock (Infographics)

Key Differences Between Common Stock vs Preferred Stock

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

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.

The management issues Preference shareholders when borrowing limitations exist and decides to maintain a healthy D/E ratio. However, the Equity shareholders remain and enjoy their voting rights, and Sometimes preference shareholders could be converted into Equity shareholders.

In the case of Equity shareholders, the company fixes the dividends, whereas the dividend amount depends on the company’s profitability in the case of other shareholders.

Preference shareholders can claim them after Assets selling during the winding up of the Business. Before any payment can be made to the Equity shareholders, all the dues must be met.

Comparison Table of Common Stock vs Preferred Stock

Basis of Comparison

Equity Share

Preference Share

Related to Related to the investment done by the owners of the company and the return is not guaranteed. Capital held by the owners of a company. Represents the Owners’ capital with a fixed rate of return irrespective of the business situation.

Meaning Equity is related to a part of the capital invested in business without borrowings. Equity capital is termed the shareholder’s capital. Preferred capital also includes the shareholder’s capital, but the characteristics differ from Equity. It has both elements of debt.

Voting Right All the Equity shareholders have voting rights; they can participate in selecting Directors. Preference shareholders do not participate in voting rights as they do not have the right to vote for the Directors.

Calculations Equity shareholders = Assets – (liabilities+ preference shareholders) Preference shareholders = Assets – (liabilities+ equity shareholders)

Risk Equity holders are not entitled to receive dividends if the business is not performing well. Equity holders bear the business risk, and they share both the profit and loss of the Business. When winding up the business, they have to contribute if the realization of the assets does not meet liabilities. Equity shareholders are to receive Dividends. The company’s performance does not matter in the case of its rate of return. They are entitled to a fixed rate of return despite the business scenario. The Board of Directors has to approve extra dividends for Preference shareholders in case of higher company profitability.

Winding up of Business Equity holders cannot claim their part unless all the related parties and borrowers are paid. Preference shareholders can claim their part before the equity shareholders.

Conclusion

Both Common stocks vs Preferred stocks constitute the share capital of a company, and they are the company’s real owners. On most days, the importance of Preference shareholders is diminishing, and few companies use Preference share capital for their 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. In income cases, when the borrowings become high, the Debt to Equity ratio doesn’t become favorable. The Preference share capital is used for CAPEX expansion, working capital needs, payment of any related party, etc.