Difference Between Common and Preferred Stock

The differences between common and preferred shares are related to the rights and privileges that an investor has when he is a shareholder in a company.

The most important differences are the following:

• The preferred share is a share that confers on its holder an extra privilege, generally of an economic nature, with respect to what we commonly know as ordinary shares. For example, the holder of a preferred share has a higher hierarchy in the collection of dividends or in the distribution of the remaining assets in case of bankruptcy by the company. Preferred shares do not give their holder the right to vote at ordinary or extraordinary shareholders' meetings, nor do they assign any participation in the company's capital.

• In the event that there are assets in liquidation, the collection hierarchy is better for the preferred shareholder than for the ordinary shareholder. In addition, the preferred shareholder may have other privileges such as access to new shares at a discounted price with respect to the market price or the nominal price, remuneration in kind, higher dividend yield of its shares, share exchanges or other rights derived from the holding of preferred shares.

• The liability of the ordinary shareholder is always limited, however, that of the preferred shareholder may not always be so under certain conditions. Generally, the preferred shareholder is more linked to the company's policy and long-term performance, while the ordinary shareholder seeks to obtain profitability in the short or medium term and tries to speculate on the value of the share, therefore, in many cases, they are not shareholders who identify with the company's policy since what they seek is to speculate on the future valuation of the company, they enter and leave it depending on whether they see market conditions or there is news regarding the value, such as takeover bids . , IPOs , capital increases , splits.

Common and preferred shares have always existed and are a way of giving value and importance to the company, since these differences allow the creation of financial models adapted to different investment profiles of its shareholders, rewarding those who believe in the future value of the company. company and its policy or business model.