What is the difference between common and preferred shares?

The difference between common shares and preferred shares lies in their ownership rights, dividend payments, and their position in the company's capital structure. Here are the key distinctions:

1. Ownership Rights: Common shareholders have voting rights in the company's decisionmaking processes, such as electing the board of directors and voting on important corporate matters. Preferred shareholders, on the other hand, usually do not have voting rights. This means common shareholders have a say in the company's management and direction, while preferred shareholders do not participate in voting.

2. Dividend Payments: Common shareholders receive dividends from the company, but these dividends are not guaranteed. The company's board of directors decides whether and how much dividend will be paid to common shareholders based on the company's financial performance and other factors. Preferred shareholders, on the other hand, have a fixed dividend rate, which means they are entitled to receive a predetermined dividend amount before any dividends are paid to common shareholders. The fixed nature of preferred dividends provides more stability and predictability compared to common dividends.

3. Liquidation Preference: In the event of the company's liquidation or bankruptcy, preferred shareholders have a higher claim on the company's assets than common shareholders. This means preferred shareholders are more likely to receive their investment back before any remaining value is distributed to common shareholders.

4. Price Volatility: Common shares typically exhibit more price volatility than preferred shares. The price of common shares can fluctuate significantly based on market conditions and the company's performance. Preferred shares, with their fixed dividend rate, are less influenced by market fluctuations and are considered to be more stable.

5. Convertibility: Preferred shares may have an option to be converted into common shares at a predetermined price and time. This conversion feature allows preferred shareholders to participate in the potential capital appreciation of the company's common shares.

Investors may choose to hold common shares if they seek voting rights and are willing to take on more price volatility. On the other hand, preferred shares may be preferred by investors who prioritize a stable income stream from dividends and a higher position in the company's capital structure.

It's essential for investors to understand the characteristics and risks associated with both types of shares and consider their own investment objectives and risk tolerance before making investment decisions. Each type of share offers unique advantages and disadvantages, and a diversified portfolio may include a combination of both common and preferred shares based on the investor's preferences and financial goals.