Differentiating Common And Preferred Stocks
differentiating common and preferred stocks

Differentiating Common And Preferred Stocks

The two primary types of stocks traded on the Australian Securities Exchange (ASX) are common and preferred stocks. Both types of stocks represent ownership in a company, but there are some critical differences between the two.

To begin with, common stocks are the most favoured type and typically make up most of a company’s outstanding shares. Preferred stocks, on the other hand, are less favoured and typically make up a smaller portion of a company’s shares outstanding. Below are some of the major differences found between the two types of stocks.

Voting rights

One of the key differences between common and preferred stocks is voting rights. Common shareholders typically have one vote per share, while preferred shareholders do not have voting rights. Therefore, common shareholders have a say in how the company is run, while preferred shareholders do not.

Dividends

Another critical difference is dividends. Common shareholders are only entitled to receive dividends if the company declares them. Even then, they may not receive the total dividend if the company decides to pay out a smaller percentage to all shareholders.

Preferred shareholders, on the other hand, are typically guaranteed a fixed dividend payment each year. These payments are often cumulative, meaning that if the company does not declare a dividend in one year, the preferred shareholders are still entitled to receive the total dividend in future years.

Liquidation preference

Another critical difference is liquidation preference. If a company is liquidated or sold, common shareholders typically only receive their money back after all debts and liabilities have been paid off.

Preferred shareholders, on the other hand, typically have a ‘liquidation preference’, which means they are entitled to receive their money back before common shareholders.

Convertibility

Convertibility is another critical difference between common and preferred stocks. Preferred shares are often convertible into common shares, while common shares are not typically convertible into preferred shares.

Therefore, preferred shareholders can convert their shares into common shares if they choose, while common shareholders do not have this option.

Price

The price of common and preferred stocks can also differ. Preferred stocks typically trade at a higher price than common stocks since they offer more stability and predictable dividends.

On the other hand, common stocks can be more volatile in price and may offer less predictable dividends.

Risk

Risk is another crucial difference. Preferred stocks are often considered less risky than common stocks since they offer fixed dividend payments and priority in the event of liquidation.

On the other hand, common stocks are often considered riskier since they do not.

Minimum investment

Another critical difference is minimum investment. Common stocks typically have no minimum investment requirements, while preferred stocks may have minimum requirements.

Therefore, anyone can buy shares of a company if it is trading common stock, but not everyone can buy shares of a company if it is only trading preferred stock.

Exchange listing

The final difference between common and preferred stocks is exchange listing. Common stocks are typically listed on major exchanges such as the New York Stock Exchange or the Nasdaq, while preferred stocks are not.

Therefore, common stocks are more accessible to investors than preferred stocks.

How to trade common stocks in Australia

Pick a broker

The first step to trading common stocks in AU is to pick a broker. There are many different brokers available, so it’s essential to compare their fees and features to find the one that best suits your needs.

Open an account

Once you’ve selected a broker, you’ll need to open an account with them, which will usually require you to provide some personal information and may require you to deposit money into the account.

Choose the stock you want to buy

Once you have an account, you can choose which stocks you want to buy. When picking a stock, it’s essential to research the company and its financials to ensure it’s a good investment.

Place an order

Once you’ve selected the stock you want to buy, you’ll need to place an order with your broker. It will usually involve specifying the number of shares you want to buy and the price you’re willing to pay.

Monitor your position

After placing your order, monitoring your position is essential to ensure the stock performs as expected. If the stock price changes, you may need to sell or buy more shares.

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