What is COMMON STOCK?
Common stock is like owning a small piece of a big company. When you buy common stock, you become a part-owner and get to vote on important decisions. If the company does well, your stock can become more valuable!
What is PREFERRED STOCK?
Preferred stock is another way to own a piece of a company, but it's a little different. With preferred stock, you get paid before the common stockholders. It's like being first in line to get a treat!
Key Differences
The biggest difference is who gets paid first. If the company makes money, preferred stockholders get their share before common stockholders. Also, common stockholders get to vote, while preferred stockholders usually don't. Think of it like this: common stockholders are the owners, and preferred stockholders are like special lenders who get paid back first.
Another key difference is the potential for profit. Common stock can grow a lot if the company does really well, but it can also lose value if the company struggles. Preferred stock usually has a fixed payment, so you know how much you'll get, but it might not grow as much as common stock.
When to Use Each One
If you're feeling adventurous and believe a company will do amazing things, common stock might be a good choice. For example, if you think a new video game company will create the next big hit, buying their common stock could be exciting! You get to be part of their journey and potentially make a lot of money.
If you prefer a more predictable income and less risk, preferred stock could be a better fit. Imagine a company that provides water to your town. People always need water, so the company is likely to pay its preferred stockholders regularly. It's a safer investment, even if it might not grow as much.
The Bottom Line
Choosing between common and preferred stock depends on your goals and how much risk you're willing to take. Common stock is like a roller coaster – it can be thrilling, but also a little scary. Preferred stock is more like a steady train ride – reliable and predictable. Think about what you want from your investment and choose the one that's right for you!