People invest in a company and they receive stock representing their equity ownership in the company. But not all stock is created equal! Companies can issue different share classes to attract different investors.
Here are a few differences between preferred and common stock:
Characteristics of Common Stock
- Upside Potential for Shareholders: Almost unlimited
- Downside Potential for Shareholders: Stock could fall to €0 in value
- Share Price Volatility: Typically Higher than Preferred Stock
- More Suitable for: Principal Growth Investors (FFF, Angels, VCs)
- Voting Rights: Yes (usually)
- Stock Classes: Usually just one, but can sometimes have more than one if there is a need for special voting rights
Characteristics of Preferred Stock
- Upside Potential for Shareholders: Limited to redemption value, except for convertible preferred stock.
- Downside Potential for Shareholders: Stock could fall to €0 in value, but is less likely to do so
- Share Price Volatility: Much lower than Common Stock
- More Suitable for: Yield/Income Focused Investors (Private Equity, Institutional Investors)
- Voting Rights: No
- Stock Classes: Usually multiple, with no limit of how many a company can issue