Preferred or Common Stocks – Which Ones Should You Include in Your Portfolio?

One important question stock investors often find themselves confronted with at different times is the type of stocks to include in their portfolios. The usual challenge here is choosing between the Prefered and Common Stocks. Should you fill your share dealing accounts with only the Preferred stocks or should you go for the common stocks? What are the advantages and disadvantages of investing in any of these two stocks? This work has provided useful insights into these important questions today. To guide you in making decisions.

Meaning of preferred stocks

Preferred stocks are a more secure means of stock trading that offers investors a fixed dividend over time enabling them to maximize their returns from stock investments and reduce losses even if the prices lose value in the future. This method of stock trading has become investors’ favorite today as it combines the common features of stock with those of bonds, in which case investors are offered fixed returns over an agreed period.

Investing in the preferred stocks gives shareholders some claims over the company’s assets and qualifies them to count as co-owners of the company. The only limitations on investors when they purchase the preferred stocks is that they are not offered a voting right.

What are common stocks?

Common stock investments are the most popular way of investing in stocks today. Here, shareholders hope to benefit from the future growth in the prices of the stocks they have purchased.

Investing in common stocks offers investors the right to vote and to elect the company’s board of directors. However, common stockholders are often considered lower-class investors compared to preferred stockholders. Hence, they receive dividends from what remains after the latter have been settled.

What is the difference between Prefered and Common Stocks

• Voting rights: Only common stockholders are offered voting rights in terms of what policies the company is to adopt and directors to elect. The preferred shareholders are not given this right.

• Preferential treatment: Preferred stockholders are given some preferential treatment when it comes to receiving dividends from the company, especially in cases of the company’s liquidation.

Which should you include in your portfolio between the Prefered and Common Stocks

The fact that investing in Preferred stocks pays more dividends compared to common stocks has made it the investors’ favorite today. Many investors today now choose to include Preferred stocks in their portfolios compared to common stocks.

However, investors who are desirous to vote as to influence the company’s policies find it necessary to include the common stocks in their portfolios too. This offers them the voting rights they desire and also helps them to diversify their portfolios too.

Advantages of buying the Common Stocks

• Offers investors voting rights on the policies to adopt.

• Investors look forward to benefiting from future price growth.

Disadvantages of buying the Common Stocks

• Common Stockholders often served as liabilities to preferred holders.

• Often no dividends are offered for investing in the common stocks.

• There are higher risks involved in buying common stocks compared to Preferred stocks.

Advantages of investing in the Preferred stocks

• There are fixed dividends offered to investors.

• Gives investors the right to claim the company’s assets in cases of liquidation.

• Investors have the privilege to convert the Preferred stocks into common stocks in the future.

Disadvantages of buying the Preferred stocks

• Investing in Preferred stocks does not offer investors the right to vote on the company’s policies.

• Investors are often attracted to Preferred stocks based on the number of dividends offered. Hence, prices could fall when the dividends reduce.