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Financial Literacy

Financial Literacy

Home Finance Investing Common vs. Preferred Shares

Common vs. Preferred Shares

Common shares may be…common, but they're the ones who stand to gain the most when a company does well.

Stocks are usually divided into two classes: common stock and preferred stock.

Here's a handy chart to help you compare the rights and benefits of each:

When the company...Preferred Stockholders...Common Stockholders
is doing really wellget the same amount of cash dividends each year.have the opportunity to get more money if the board of directors decides to distribute extra profits among common shareholders.
is going bankruptget any leftover money after the company has liquidated its assets and paid its debtors and employees.are last on the list of people getting money from liquidated assets, which means they may get left with nothing.
is doing business as usualget cash dividends as promised (if the company pays them out) but don't get a vote.get a vote on major company decisions through the board of directors and may get some money if the business is offering dividends.

The exact differences will depend on the specific company.

Some companies are zany and may give preferred stockholders voting rights or common stockholders other rights. But the above chart is the usual stuff you can expect if you log onto your E*Trade account and want to snap up some shares.

The big thing to remember is that common stock comes with more risks, but it also provides the potential for more cash profits if the company takes off. Preferred stock comes with slightly fewer risks but also less potential for dividends if a company is successful.

Your Company Went Belly Under: Now What?

Let's say you invest in Acme Corporation, but after several big lawsuits by Wile E. Coyote and thousands of bad reviews online, the company folds.

Are your stocks useless?

As part owner of the company, you may have the right to come of the assets. Acme will stop operations and will sell what's left of its assets, inventory, and other stuff. A judge will oversee the bankruptcy process, usually, and the money from sales will be paid out in this order:

  • The IRS gets first dibs, because they're the government and they can do that.
  • Vendors. If the Bugs Bunny Marketing Service is owed $500 for those brochures last month, Bugs gets paid next.
  • Salaries to employees
  • Bank loans
  • Lower rated and junior bonds
  • Preferred stock
  • Common stock (this is covered in the fine print of your rights as a stockholder in the phrase "residual claim on assets")

By the time we get to common stockholders, there's often very little left, in part because all those Acme Corporation products might not sell at full price on eBay and the company may have been running on debt for years.

At least The Road Runner will be pleased.

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