When companies were first becoming publicly traded, common shares were all you could get. Common shares give you a vote at the shareholder's meeting. The more shares you own, the votes you get. Sometimes, companies worried about one shareholder getting too much control by owning too many shares and voting whatever way their whims took them.
One of the ways companies dealt with this is to own a majority of voting shares themselves and only releasing (for example) 49% of the voting shares to the public. Thus, no one could ever out-vote them. The unfortunate thing, those, was that this is costly. Companies become publicly traded so they can raise large amounts of capital to fund growth. If they have to buy 51% of the shares in order to maintain a voting advantage, they're not generating as much money as possible.
Preferred shares were introduced as a way to raise even more capital without giving up voting rights. Preferred shares are not voting shares. Instead, they get fixed dividend on a regular basis. If you think of common shares on one side of the spectrum and bonds on the other side of the spectrum, preferred shares fall somewhere in the middle.
In one sense they are like stocks in that they are actual shares of the company, but in another sense they are like bonds in that they pay regularly and do not receive a vote in the shareholder's meeting. When a company has to make payouts, the money first goes to pay the debt on bonds, then it goes to pay the dividends on preferred shares, and whatever is left over may or may not be given out as a dividend on common shares. If money is tight at a company, common shares dividends are first to go.
So which should you own? Growth oriented investors will probably want to buy common shares. Common shares are riskier because they are last in line when it comes to payouts; the majority of money you make is from the rise in price between the purchase and the sale. But they are also more actively traded and thus the reward could be higher. Income oriented investors will likely find preferred shares to be a good way to go: The money coming in is fairly predictable and likely won't stop unless the company falls on VERY bad times. If you are a growth oriented investor looking for a little extra income in your investments, consider finding common shares in blue chip companies that have a history of making their dividend payments.
Some companies are very faithful at this and even though their stock prices are likely a little more expensive, you can be assured of a reasonable likelihood of growth and income.
Thomas J. McCarthy is an investor, entrepreneur and The Dean of Education at www.CollegeStock.com whose perspectives have changed the way people think about money and investing. www.CollegeStock.com is the World's #1 School of High-Risk Investing. CollegeStock seeks to provide a community in which risk-tolerant investors can learn about and discuss issues relating to finance and investing.
