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