When it comes to investing in the stock market, you may believe that all shares are created equal. In reality, there are different classes of shares in which you can choose to invest. Some stocks are considered to be preference or preferred shares, while others are known as common or ordinary shares.
Common vs preferred
When you buy a share of stock in the stock market, you are most likely buying common shares. This is the most widely traded type of share available in the market. Many companies also offer a separate class of preferred shares, and you can also trade preferred shares on the stock exchange. The price of preferred shares usually is different from the price of ordinary shares, so it is important to know which type of share you are buying.
One of the key differences between preferred shares and ordinary shares is the dividends that are distributed to each type of shareholder. With preferred shares, shareholders are guaranteed a certain amount of dividend payment. This makes preferred shares similar to owning a corporate bond. With common shares, shareholders also may be entitled to receive dividends, but these dividends are not guaranteed and the company can choose the amount it wants to distribute.
Claim on assets
Another key difference between these two types of shares is the claim on assets. When a company goes out of business, the preferred shareholders hold a higher priority in obtaining the company's remaining assets than do the common stock holders. By the time all the company's assets are distributed, there may be nothing left for the common shareholders. This makes investing in common shares riskier.
Even though investing in common shares has some disadvantages, it also has a major advantage over preferred shares. With common shares, the value of the shares can increase substantially. If the company performs well, the value of the common sshare could be multiplied. With preferred shares, the value tends to stay relatively fixed. If you value capital appreciation over fixed income, common shares may be the more appropriate way for you to invest.