What is Common and Preferred Stock?
Getting into the trading landscape can be a complicated and time-consuming process. There’s more to it than simply deciding on an industry that you feel comfortable with and opening an account to start day trading. You need to get a deeper understanding of your risk proficiency levels and think carefully about how you can diversify your portfolio. You also need to build on your education, starting with learning what specific terms mean, and how they might affect you. One of the most important distinctions to make when you’re first getting started, is what the difference is between a common and a preferred asset. Today, we’re going to define both options to help you take the next step in your wealth-building strategy.
What is a Common Share?
If you’ve been looking into things like day trading for beginners or penny stocks, then you probably already know what it means to buy a share in a company. You own a portion of that entity from a legal position and can sell that portion later for a profit if the organization increases in value. Businesses sell stocks to investors as a way of developing cash for innovation and growth. However, there are two different kinds of asset available.
The first is the “common” option. This represents ownership of a legally formed corporation. For most businesses, there is a simple class of shares that can represent the entire company. However, there are some organizations that have multiple classes of stock to consider. Often, one particular class might have more voting rights, or more access to specific benefits than another. It’s worth looking into this when you’re getting started. Make sure that you know all your rights as a holder before you spend any of your money.
What’s a Preferred Asset?
Common asset owners are entitled to a proportionate amount of the earnings from a business, and these can be distributed as dividends. Those who get the best share are often referred to as owners of blue-chip securities. A preferred stock falls into this kind of category. If you’re a “preferred” owner, then you will be entitled to a larger dividend in return for your purchase. On top of that, the dividend is guaranteed, so you don’t have to worry about losing money. Holders of these assets don’t necessarily have rights to vote on business decisions. However, they can get a special status if a business goes bankrupt.
If, for any reason the company that you spend money on goes into insolvency, and starts to be liquidated, you’ll be able to get your money before any common holders. This can often make the preferred route a more attractive option for people who want to avoid taking excessive risk. There are situations in which some holders can turn a preferred asset into a series of common stock, but it’s not possible to go the other way around. Depending on the businesses that you get involved with, you might find that there are different kinds of preferred securities. This includes the convertible preferred solution, which we mentioned above.