The Difference Between Common and Preferred Stock

Common stock and preferred stock are some of the most frequently used types of stock in many of the largest companies in the world. Each represents a share of ownership in a company, but they have a few differences that distinguish their use cases.

Common Stock Overview

• Residual claim - Common stockholders have the last claim on the company's assets and earnings after all creditors and preferred stockholders are paid.

• Dividends - Common stock dividends are not guaranteed and are determined by the company's profitability.

• Voting rights - Common stockholders typically have voting rights in company matters, allowing them to participate in decisions.

Preferred Stock Overview

• Earning Priority - Preferred shareholders have a higher claim on the company's assets and earnings. They receive dividends before common stockholders.

• Fixed dividend - Preferred stockholders typically receive a fixed dividend, similar to a bond interest payment.

• No voting rights - Generally, preferred stockholders do not have voting rights in company matters.

Preferred stock is considered less risky than common stock due to its priority position and fixed dividend. This means that common stock is generally considered riskier, but has the potential for higher returns through capital appreciation if the company's stock price increases.

Common stock is prescribed by law; each share of common stock carries one vote, and common shareholders are entitled to a prorated share of common stock dividends (if a dividend is declared). Preferred stock has no set prescription or formula under Delaware law. Preferred stock voting rights vary from company to company, and its terms are open and limited only by what the Board of Directors negotiate. It can be structured to offer the investors preferential financial assurances without giving them voting rights.

When it comes to distributing common stock vs preferred stock, they are not exclusive - they can be used together. One popular method of preserving insider voting control when raising investment capital is to use preferred stock in addition to common stock.

Earnings

In some preferred stock models, a number of specified stockholders may be assigned superior dividends, liquidation rights (if the company should file for bankruptcy protection) and other considerations. The company can have the right to buy out preferred stockholders at a given price, or at a given date in the future for a formula price. The flexibility of the preferred stock model truly represents one of the great advantages of Delaware corporation law, so much so that sometimes corporate lawyers refer to this type of stock as "blank check preferred stock".

Corporations can also increase the number of common shares and preferred shares available at any time with a stock amendment. Our team can help with this process once you know how many shares you’d like to authorize and what the new par value will be

Stock Certificates with HBS

When you purchase preferred stock certificates through Harvard Business Services, Inc., you will receive 10 stock certificates marked "preferred," a white paper report describing in more detail how to use preferred stock and all the required additions to your Certificate of Incorporation and corporate records to authorize you as a seller and issuer of preferred stock. If you purchase these preferred shares at the time of formation, we only charge $150. If you decide to purchase them later, the charge will be $350.

For more information on preferred stock, please see our introduction to preferred stock page.