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Common vs Preferred Stock - What is the Difference? - YouTube
Channel: The Motley Fool
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hey there I'm Dylan Lewis from The
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Motley Fool in this FAQ or breaking down
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common misconceptions about stock types
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and the difference between common and
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preferred stock businesses raise money
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from investors by selling stock in one
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of two types common stock or preferred
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stock both common stock and preferred
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stock can be worthwhile investments and
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you can find both types of stock on
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major exchanges there can be many
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differences though between common and
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preferred stock and depending on your
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needs one might be more suitable for you
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even though its name might suggest that
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preferred stock is a better investment
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most investors should focus on common
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stock because if it's potential for
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unlimited growth more on that in a
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minute
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common stock gives investors partial
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ownership in a company many companies
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exclusively issue common stock to
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investors and there's a lot more common
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stock available on stock exchanges than
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preferred stock investors holding common
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stock typically have the legal right to
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vote on the representatives on the
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company's board of directors and to
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approve major corporate decisions such
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as mergers and acquisitions common
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shareholders also have the right to
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receive any dividends that accompany
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declares on their shares now the most
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attractive feature of common stock for
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investors is that its value can rise
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dramatically over time as a company
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becomes more successful its common stock
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price typically goes up the most
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lucrative common stocks have seen their
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prices multiplied a hundredfold or more
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over the course of the company's history
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however common shareholders have the
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lowest priority for getting any of their
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money back when things go poorly
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creditors who lend money to the company
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typically must get paid back in full
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before any shareholder
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common or preferred can receive anything
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from the liquidation of a company's
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assets even if there's something left
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over after creditors have gotten paid
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preferred shareholders still stand ahead
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of common shareholders up to a certain
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maximum amount common shareholders only
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receive anything if there's anything
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left over after all of that has happened
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most of the time companies have just one
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class of common stock sometimes though
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companies will issue two or more classes
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especially if they want to have one
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class of shareholders with different
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voting rights than another class
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preferred stock often looks a lot more
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like a bond as it typically has a set
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dollar amount that the company can pay
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preferred shareholders to redeem the
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shares most preferred stock pays
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dividends and the amount tends to be
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higher than what common shareholders
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will receive generally preferred stock
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pays fixed dividend year in and year out
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rather than seeing those dividend
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payouts change quarter to quarter which
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is what you tend to see you with a
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common stock the label preferred comes
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from two major advantages that preferred
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stock has over common stock the company
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must pay dividends to preferred
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shareholders before common shareholders
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receive any dividends and two if a
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company fails and its assets get
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distributed to investors preferred
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shareholders must receive a fixed amount
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of money before any common shareholders
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can get any of their investment back
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those attributes make preferred stock
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especially attractive for investors
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whose primary focus is on income most
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preferred stock won't see large price
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increases even if the company that
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issued it is successful however
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predictable dividends that have priority
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over common stock dividends give
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preferred shareholders more confidence
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that the company will pay out the income
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that they need there's no limit to the
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number of different preferred share
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classes a company can issue and it's not
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unusual for a company to define multiple
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preferred share classes featuring
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different dividend rates and dates at
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which the company can redeem the stock
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by paying their investors the capital
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back companies can also issue
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convertible preferred stock in addition
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to having the normal attributes of
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preferred stock convertible preferred
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gives the shareholder the right to take
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their preferred shares and divert them
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into regular common stock under certain
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circumstances that right gives
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convertible preferred stock more upside
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potential than regular preferred stock
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making it an attractive option for some
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investors like the combination of higher
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dividend income and the possibility of
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share price appreciation over time
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here's a quick at a glance for the major
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differences between common stock and
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preferred stock the important takeaways
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of a common stock has greater upside
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potential and greater downside risk than
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preferred stock but they also get more
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of a say in how the business is run and
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preferred stock gets priority if things
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go poorly and can be a better fit for
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dividend investors
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most investors want stocks as
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investments because they're interested
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in long-term growth for their portfolio
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for them common stock is usually the
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better choice because they care more
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about seeing their shares grow as a
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company succeeds for growth oriented
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investors who like the features of
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preferred stock choosing a convertible
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preferred can also be a smart move and
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if your primary focus as an investor is
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on current income preferred stock can
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give you more of what you're looking for
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with fixed dividend payouts that are
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often more reliable than dividends on
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common stock preferred stock can
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increase the amount of income you get
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from your investments while also
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reducing the overall risk level for your
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portfolio by the way if you want more
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info on dividend investing check out our
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free dividend PlayBook at fool.com slash
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pay me it's got everything you need to
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know to get started and a couple stocks
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as well it'll be a link down in the
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description okay that's gonna do it for
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