Common Stocks vs Preferred Stocks | Similarities and Differences
Summary
TLDRThis video explores the differences between common and preferred stocks, explaining how each provides investment returns and carries different levels of risk. Common stocks offer higher potential returns through capital gains and dividends but come with greater risk. Preferred stocks, however, provide more stable returns primarily through dividends and have lower risk due to their priority in dividend payments. The video also highlights that common stockholders have voting rights, unlike preferred stockholders.
Takeaways
- 📈 Common stocks have higher return potential than preferred stocks due to capital gains and dividends.
- 💼 Preferred stocks offer mainly dividend income with less volatility in stock prices.
- 💰 Most profits in the stock market come from stock price increases, which preferred stockholders miss out on.
- 📉 Preferred stocks have lower risk compared to common stocks as their prices don't fluctuate as much.
- 💡 Companies prioritize paying dividends to preferred stockholders before common stockholders, reducing risk for preferred shareholders.
- 🏦 If a company has limited cash for dividends, preferred stockholders get paid first, potentially leaving common stockholders with nothing.
- 🔄 With more cash for dividends, preferred stockholders receive their fixed amount, and the remainder goes to common stockholders.
- 🗳️ Common stockholders have voting rights on corporate matters, while preferred stockholders typically do not.
- 💭 Preferred stockholders have more certainty of investment returns due to preferential treatment over common stockholders.
- 🌐 The video invites viewers to comment on their preference between common and preferred stocks and encourages subscription for more investment insights.
Q & A
What are the two types of stocks discussed in the script?
-The script discusses common stocks and preferred stocks.
What is the primary way investors profit from common stocks?
-Investors in common stocks can profit from both capital gains and dividends.
How do preferred stock prices typically behave compared to common stocks?
-Preferred stock prices usually don't move much and are contained in a tight band, with most returns coming from dividends rather than capital gains.
What is the main difference between the investment return potential of common stocks and preferred stocks?
-Common stocks generally have higher return potential due to the possibility of significant capital gains, while preferred stocks offer more stable but lower returns primarily through dividends.
Why do preferred stocks have a lower risk profile than common stocks?
-Preferred stocks have a lower risk profile because their prices are more stable and they have priority over common stockholders when it comes to receiving dividends.
What is the preferential treatment of preferred stockholders in terms of dividends?
-Preferred stockholders must be paid their dividends before common stockholders can receive any, which gives them more certainty of their investment returns.
How does the script illustrate the difference in dividend payments between preferred and common stockholders?
-The script uses an example where if a company has only enough cash to cover preferred dividends, all of it goes to preferred stockholders, leaving nothing for common stockholders.
What is the typical voting right difference between common and preferred stockholders?
-Common stockholders usually have the right to vote on corporate matters, while preferred stockholders are typically structured without voting rights.
What is the impact on returns when preferred stockholders have their dividends paid first?
-This preferential treatment limits the downside risk for preferred stocks and provides more certainty for their investment returns.
How does the script suggest investors might choose between common and preferred stocks?
-The script implies that investors might choose between common and preferred stocks based on their risk tolerance and preference for potential returns versus stability.
What additional resources does the script suggest for learning more about investing?
-The script suggests visiting the channel's website for more information about investing.
Outlines
📈 Understanding Common vs. Preferred Stocks
This paragraph introduces the topic of the video, which is the comparison between common and preferred stocks. It explains that while common stocks are what most people refer to when discussing investments, a minority of companies also issue preferred stocks. Both types of stocks represent ownership in a company and provide a claim on its assets and profits. The paragraph sets the stage for a deeper dive into the similarities and differences between these two types of securities, promising to provide viewers with a solid conceptual understanding by the end of the video.
💼 Key Differences in Returns and Risk
This paragraph delves into the differences between common and preferred stocks, focusing on their investment returns and risk profiles. Common stocks are noted to have higher return potential due to the potential for both capital gains and dividends, whereas preferred stocks offer more stable returns primarily through dividends, with less volatility in their stock prices. The paragraph highlights that preferred stocks offer less upside potential but also come with lower risk, as their prices are less volatile. It also explains that preferred stockholders have priority over common stockholders in receiving dividends, which provides them with more certainty in their returns. The lack of voting rights for preferred stockholders is also mentioned, contrasting with the voting rights common stockholders have on corporate matters.
🗣️ Engaging with the Audience
The final paragraph of the script invites viewer interaction by asking for their preference between common and preferred stocks and encouraging them to leave a comment. It also prompts viewers to like the video, subscribe to the channel, and visit the website for more information on investing. This call-to-action is designed to engage the audience and grow the community around the channel's content.
Mindmap
Keywords
💡Common Stocks
💡Preferred Stocks
💡Investment Return
💡Risk Profile
💡Capital Gains
💡Dividends
💡Stock Market
💡Voting Rights
💡Liquidation
💡Profits
💡Downside Risk
Highlights
Introduction to the comparison between common and preferred stocks.
Common stocks are typically what people invest in, representing the majority of company shares.
Preferred stocks are less common but are also publicly traded like common stocks.
Both common and preferred stocks represent an investment in the underlying company.
Investors in both types of stocks have a claim on the company's assets and profits.
Key differences between common and preferred stocks lie in investment return and risk profile.
Common stocks offer higher return potential due to capital gains and dividends.
Preferred stocks primarily offer returns through dividends with less volatility in price.
The majority of stock market profits come from capital gains, not dividends.
Preferred stocks have a lower profit potential but also lower risk compared to common stocks.
Preferred stockholders have priority over common stockholders in receiving dividends.
In a scenario where dividends exceed available cash, common shareholders may receive nothing.
Preferred shareholders have more certainty in their investment returns due to preferential treatment.
Preferred stocks limit downside risk because of their higher claim on assets and profits.
Common stockholders usually have voting rights, while preferred stockholders typically do not.
Engagement request: Viewers are asked to comment on their preference between common and preferred stocks.
Call to action: Encouragement to like the video, subscribe to the channel, and visit the website for more investing information.
Transcripts
hey guys welcome to LUMO vest in this
video we're going to talk about common
stocks versus preferred stocks and how
investors make money from these two
securities when people talk about stocks
on TV or on the internet they're usually
referring to common stocks that's what
all companies have and generally what
people invest in when they buy stocks
but a small portion of companies will
also have preferred stocks in addition
to common stocks these preferred stocks
are publicly traded on the stock market
just like common stocks so today we're
going to learn about the similarities
and differences between common stocks
and / furred stocks by the end of this
video you would have developed a really
solid conceptual understanding of the
two types of stocks available on the
stock market let's start with
similarities both common stocks and
preferred stocks are stocks and
companies when we invest in them were
really investing in the underlying
companies both entitle you to claim on
the company's assets and profits meaning
the money that the company makes from
selling its products and services is
given to both common stockholders and
preferred stockholders so how are they
different the key differences between
the two types of stocks is mainly in
terms of the investment return and risk
profile said differently the key
differences between the two is how the
investors can profit from the investment
and the level of risk investors have to
bear common stocks generally have higher
return potential than preferred stocks
that's because whereas common
stockholders profit from both capital
gains and dividends preferred
stockholders profit mainly from
dividends if you don't understand the
distinction between capital gains and
dividends check out our other video
explaining this concept preferred stock
prices don't move much they're usually
contained in a tight band so most of the
investment returns will come from
dividends as opposed to capital gains
this is huge this has major impact on
returns most of the profits in the stock
market come from increases in stock
there are stocks whose prices can
increase by 50 or a hundred percent but
dividends may only pay 2 to 6 percent
once you remove the ability to profit
from stock price increases the returns
profile for stocks is much lower and
that's essentially what preferred stocks
is doing so investors in preferred
stocks really don't get the same upside
potential as the investors in common
stocks that said while the preferred
stocks don't have as much upside
potential they also have much lower risk
remember stock prices can go both ways
it can go up but it can also go down the
common stockholders bear much greater
risk in this regard than the preferred
stockholders because the preferred stock
prices don't move much so the preferred
stocks have lower profit potential but
also lower risk another reason why
preferred stocks have a lower risk
profile is because companies have to
prioritize giving the money to the
preferred stock holders that they're
entitled to every period before they can
give money to the common stockholders
whatever remains can be paid to the
common stockholders said differently
they have preferred status over common
stockholders when it comes to the claim
on the company's profits and assets
that's why they're called preferred
let's illustrate with an example say a
company only has a hundred million
dollars of cash to pay dividends and say
the preferred shareholders are entitled
to a hundred million dollars in dividend
payments in this case all of it will
have to be paid to the preferred
shareholders first leaving nothing left
for the common shareholders in this
situation common shareholders won't
receive any dividend payments but if the
company has five hundred million dollars
of cash to pay dividends preferred
shareholders will only get their 100
million dollars and the remaining 400
million will all go to the common
shareholders the takeaway here is that
preferred shareholders have more
certainty of their investment returns
because of this preferential treatment
over common shareholders this higher
claim for assets and profits further
limits that
downside risk for preferred stocks
another major difference between common
stocks and preferred stocks is on voting
common stocks usually entitled their
holders to vote on corporate matters
preferred stocks on the other hand is
typically structured without the ability
to vote
so whereas common stockholders can voice
their opinion and elections by casting
votes preferred stockholders can't so
these are the distinctions between
common stocks and preferred stocks now
we'd love to hear from you
do you guys lean towards investing in
common stocks or preferred stocks and
why leave a comment below thanks for
watching guys if you liked our video hit
that thumbs up button and remember to
subscribe to our Channel if you want to
learn more about investing visit our
website at
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