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Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

Common Vs. Preferred Shares

Definition:

The names give them away.

When something is common, it has the stench of bricklayers, plumbers, and people who actually work for a living, i.e., the commoners. They live at the bottom of the food chain, but they are the most powerful force in structuring society. Common shareholders function the same way. They are the last to receive payment if a company defaults, but if a company does extremely well, it is the common shareholders that make the fortune. If you own common stock, you are not guaranteed a dividend (that's the money companies pay to stockholders) but you do get voting rights on major company decisions. That can be a heady rush of power. And if the company does do really well, you will, too.

Preferred stocks occupy a higher position on the corporate food chain. Preferred shareholders stand in line before the commoners in a liquidation, so if a company goes belly-up or can only afford to pay dividends to some shareholders, preferred shareholders are closer to the front of the line. Most preferred shares have a fixed dividend which are pretty much guaranteed. In practice, preferred stock is almost always convertible into common stock at a given price; so while preferred stock looks somewhat like a bond in that there is an obligation for the corporation to pay a fixed dividend on that stock, in non-convertible preferred, those pieces of paper are really more like debt in sheep's clothing.