Beyond the primary differences, several additional distinctions between common stock and preferred stock are essential to understand.
Dividends for preferred stock are usually fixed and take precedence over common stock dividends, making preferred stock appealing for steady income. Common stock dividends generally vary based on the company's profitability. Voting rights are generally granted to common stockholders, allowing them to participate in corporate matters such as electing the board of directors. Preferred stockholders typically lack these rights, limiting their influence.
Certain preferred stocks may be converted into a specified number of common shares, providing potential benefits if the company's common stock performs well. Cumulative preferred stock accumulates unpaid dividends, which must be paid before dividends are paid to common stockholders. Non-cumulative preferred stock lacks this feature.
Participating preferred stock may receive additional dividends if specific financial goals are met, offering extra income beyond fixed dividends. This benefit is not available to common stockholders. In the event of liquidation, preferred stockholders have seniority over common stockholders, ensuring they are paid from remaining assets first and thereby reducing their risk.
