Describe common stockholders and preferred stockholders. Which one carries more advantages?

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The terms common stockholder and preferred stockholder describe two types of investors in a public company. Common stockholders own common shares in the company, as the name implies. Preferred stockholders own preferred shares.

Common stockholders hold an interest in the company that is proportionate to the number of common shares they own. For example, if the company has 1,000 shares outstanding and a common stockholder owns 100 shares, the individual holds a 10% stake in the company. If that same person decides to purchase an additional 50 shares, then their stake increases to 15%. Conversely, if the investor needs to raise cash and sells 50 shares in the public market, then his or her stake in the company falls to 5%.

Common stockholders generally have a say in certain things the company does, such as electing board members or being acquired by another corporation. In these cases, the company will put the matter to a vote of its stockholders. If each common share carries one vote and the stockholder has 100 shares, that person controls roughly 10% of the vote.

Preferred shares are another type of asset that represents a claim on the company. In general, preferred stockholders obtain preferential treatment—as the name implies—in terms of being paid dividends or in the case that the company files for Chapter 11 bankruptcy and liquidates its assets. Usually, the preferential treatment that the preferred stock conveys is spelled out in the company’s proxy statement, which is filed for the regulators and the public to review. If the preferred shares receive the same treatment in terms of voting rights as common shares, it will also be disclosed in the document.

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