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Common and Preferred Stock


The two types of stock are common and preferred stock.  Both trade on a public stock exchange, but differ in the rights given to the owners/investors. Common stocks are the most typical shares issued by companies; entitling shareholders to participate in the growth/profit of the company invested in, and include voting and preemptive rights. Preferred stocks represent partial company ownership, but with a greater claim on company assets than common and do not include voting rights.


What is Common Stock?

Common stocks are an investment security that represents partial ownership in a corporation. Typically, each share of common stock represents a vote in the corporate structure. This means that owners of stock can help elect the board of directors and have a voice in corporate policy. When a company is doing well, common stocks can go up in value.  If the stock is doing poorly, it usually decreases in value. Many corporations issue common stocks in order to raise capital used for growing or improving their business.


When a company has excess earnings, it may distribute parts of the profits to stockholders in the form of dividends, and each common stock owner will receive a proportional share. Dividends are usually distributed in the form of cash, but may be distributed as additional shares of stock too.  In the event of bankruptcy, common stockholders are last in line for a claim on company assets, but common stocks have real potential for gains.


Common Stock vs. Preferred Stock

Preferred stocks are similar to common stock in that they represent partial ownership of a corporation, but there are a few differences. While the price of a preferred stock can appreciate, it typically does not fluctuate as much as common stock, which is attractive to more risk-averse investors. In addition to increased stability, dividends are paid out to investors at regular intervals instead of at random like common stocks. Preferred stocks have a higher claim on earnings than common stock. This means that in the event a company experiences bankruptcy, the shares of preferred stock owners must be paid out before those of common stock owners.  One of the conceptual differences between preferred and common stocks is that preferred stock owners do not have voting rights in the corporation.


How to Buy Common or Preferred Stock

Investors are encouraged to do adequate research or contact a broker/financial advisor, attorney or CPA, to determine if common or preferred stocks are an appropriate investment. Once you have determined that a common or preferred stock is suitable for you, it can be purchased with your Self-Directed IRA or other retirement accounts at Mainstar Trust. Click here to find out how to use Mainstar Trust to invest in common/preferred stock