Common Stocks vs Preferred Stocks | Similarities and Differences

Summary

This 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

00:00

📈 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.

05:01

💼 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.

Keywords

💡Common Stocks

Common stocks are the most common form of equity ownership in a company. They represent partial ownership and entitle shareholders to part of the company's assets and profits. In the video, it is mentioned that common stocks generally have higher return potential than preferred stocks, as they can profit from both capital gains and dividends. An example from the script is that common stock prices can increase significantly, offering substantial upside potential.

💡Preferred Stocks

Preferred stocks are a type of stock that may have some preference over common stock in terms of dividends and the liquidation of assets. They are characterized by more stable dividend payments and less volatility in price compared to common stocks. The video script explains that preferred stockholders mainly profit from dividends and have lower risk, but also lower upside potential.

💡Investment Return

Investment return refers to the profit or loss derived from buying and selling securities. The video discusses how common stocks have a higher return potential due to capital gains, while preferred stocks offer more stable returns through dividends. The script uses the example of stock prices increasing by 50 or a hundred percent to illustrate the potential returns from common stocks.

💡Risk Profile

A risk profile is a summary of the potential risks associated with an investment. The video script contrasts common and preferred stocks in terms of their risk profiles, stating that common stocks carry more risk due to their price volatility, while preferred stocks offer lower risk due to their stable dividend payments and priority in claim on company assets.

💡Capital Gains

Capital gains are profits that result from the sale of an asset for a higher price than its purchase price. The video explains that common stockholders can profit from capital gains, which is a significant source of returns in the stock market. It contrasts this with preferred stocks, where most returns come from dividends rather than capital gains.

💡Dividends

Dividends are payments made by a corporation to its shareholders, usually as a distribution of profits. The video script highlights that preferred stockholders primarily profit from dividends, which are typically fixed and paid out at regular intervals, providing a more predictable income stream compared to the variable nature of capital gains.

💡Stock Market

The stock market is a marketplace for the trading of company stock and bonds. Both common and preferred stocks are publicly traded on the stock market, as mentioned in the video. It serves as a platform where investors can buy and sell shares of these securities.

💡Voting Rights

Voting rights are the privileges given to shareholders that allow them to vote on corporate matters. The video script explains that common stockholders usually have voting rights, which enable them to participate in corporate decision-making, unlike preferred stockholders who typically do not have voting rights.

💡Liquidation

Liquidation refers to the process of converting assets into cash to satisfy debts. In the context of the video, it is mentioned that in the event of liquidation, preferred stockholders have priority over common stockholders in receiving payments from the company's assets.

💡Profits

Profits are the financial benefit derived from business activities. The video script discusses how the profits generated by a company are distributed to shareholders, with common stockholders benefiting from both capital gains and dividends, while preferred stockholders primarily receive dividends.

💡Downside Risk

Downside risk refers to the potential for losses in the value of an investment. The video script explains that preferred stocks have lower downside risk because their prices are more stable and they have priority in dividend payments, thus protecting investors from significant losses.

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