Definition & Meaning:

If you want to buy stock/shares in companies on the stock market, there are two main types that you can choose to buy; 'common stock' and 'preferred stock'.

The main difference between the two is the 'dividend' (the annual payment you receive for owning shares in a company). With 'common stock' (which are the most common type of shares bought in companies on the stock market), the amount of dividend you'll receive can change. It is normally based on the company's profit performance. So, if the company makes a large profit, you should (but not always) receive a large dividend. But if the company makes no profit, you'll receive no dividend.

With 'preferred stock', the amount of dividend you receive doesn't change. You are guaranteed to receive a fixed 'dividend' every year during a fixed amount of time no matter how the company performs (you'll receive the same amount of dividend if the company makes a large profit or makes no profit at all).

So, this makes 'preferred stock' a less risky way of investing your money in the stock market (almost like putting your money into a bank account). In addition, if the company you own shares in goes bankrupt, people who own 'preferred stock' will be the first to receive the money from the selling of the company's assets (buildings, machinery etc...). Making it even less riskier.

There are a couple a downsides though to owning 'preferred stock'. The first is that you can't vote at shareholder meetings. Not really a big issue for most people. The second (and something you need to be aware of), is the dividend paid out to owners of 'preferred stock' is generally a lot lower over time than to owners of 'common stock'.

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Also Called:

Preference Shares, Preferred Shares.

Related Vocabulary:

Common Stock, Dividend, Board of Directors.

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