What is the difference between common and preferred stock?

Most investors buy common shares

Investors have a decision to make when buying stock: Should they buy common or preferred shares?

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Common stock gives owners a stake in a company and allows them to vote for members of the board of directors. They are the last, however, to receive dividends and compensation in the event of a bankruptcy.

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Common shares typically perform better than preferred shares due to the potential for capital gains.

Preferred shares, meanwhile, often have a higher dividend yield and make more frequent payouts. Upside is limited to the redemption value, though, and the company may also be able to call the stock away from the owner, or redeem it at a previously agreed-upon price after a specified date.

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While gains are limited, preferred owners are less likely to be wiped out. Preferred shareholders rank below bondholders in the event of a bankruptcy, but above common shareholders. They typically do not have voting rights.