Preferred and common stocks are different in two key aspects.
Firstly, preferred stockholders have a greater claim to a company’s assets and earnings. This is true during the good times when the company has excess cash and decides to distribute money in the form of dividends to its investors. In these instances when distributions are made, preferred stockholders must be paid before common stockholders. However, this claim is most important during times of insolvency when common stockholders are last in line for the company’s assets. This means that when the company must liquidate and pay all creditors and bondholders, common stockholders will not receive any money until after the preferred shareholders are paid out.
Secondly, the dividends of preferred stocks are different from and generally greater than those of common stock. When you buy a preferred stock, you will have an idea of when to expect a dividend because they are paid at regular intervals. This is not necessarily the case for common stock, as the company’s board of directors will decide whether or not to pay out a dividend. Because of this characteristic, preferred stock typically don’t fluctuate as often as a company’s common stock and dividends are typically guaranteed, meaning that if the company misses one, it will be required to pay it before any future dividends are paid on either stock.
Preferred stock are sometimes referred to as hybrid securities due to its bond-like characteristics. Like bonds, preferred have a par value which is affected by interest rates. When interest rates rise, the value of the preferred stock declines and vice versa. With common stocks however, the value of shares is regulated by demand and supply of the market participants.
Unlike common shares, preferreds have a callability feature which gives the issuer the right to redeem the shares from the market after a predetermined time.
Finally, preferred shares can be converted to a fixed number of common shares, but common shares don’t have this benefit.
Looking up a preferred stock’s quote is as easy as looking up the quote for a common share. For example,an investor that wants to look up the quote of both common and preferred for Wells Fargo would use the ticker symbol WFC for common shares and WFC.PRX, WFCPRX, or WFC-PX for the company’s Series X Class A preferred stock.
To sum up: a good way to think of a preferred stock is as a security with characteristics somewhere in-between a bond and a common stock.
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