Preferred Stocks and Common Stocks

All stocks are generally designated as preferred or common. Common stocks are stocks that offer you a bit of ownership of a company. Each common stock you have offers you a specific amount of ownership, entitles you to some dividends and allows you one vote for each share you own in electing directors or making key business decisions. Common stocks in this sense are different from debentures or bonds, which are money given to a company as a loan in return for the promise of specific interest.

Preferred stock offers you preferential treatment when it comes to paying out of dividends. If the company goes bankrupt, stocks holders holding preferred equities get faster access to any assets not used towards paying debts. If you have preferred cumulative stock, your position is secure. This type of stock allows unpaid dividends to be accrued. If a company cannot pay dividends one year, your dividends accrue until the company can pay. During such period all the money owed over the previous years will be paid. Those holding preferred types of stock usually have no voting ability and these stocks only get their pre-determined dividend and not more than that. This is to offset the other advantages of preferred status.