It’s easy and understandable for a new investor to sometimes become overwhelmed at the different terms used in the investing world. Simply putting a specified amount of money into the stock market and expecting to become wealthy isn’t realistic. If you truly want to succeed and increase your financial knowledge at the same time, you need to learn about certain terms and investment strategies along the way. Many new investors may not know the differences between common stock and preferred stock, but we’ve explained them to you here.
Common Stock Can Be A Risky Investment
Common stock is what people usually think of and purchase on the stock market. When purchasing common stock, you could earn dividend payments, but those payments are dependent on how the company chooses to operate. In many cases, dividend payments are not guaranteed since preferred stockholders are usually taken care of first. An advantage of common stock is investors have more potential for larger gains since it offers higher volatility. With that comes a greater risk of loss as well, which is why common stock is usually reserved for people who have a higher risk tolerance.
Preferred Stock Offers Distinct Advantages
Some of the distinct advantages preferred stock has over common stock are receiving larger dividend payments, greater equity claims of a company, and less volatility. Since preferred stock is not as risky as common stock, the potential for gain is also lower. However, you have a higher likelihood of receiving regular dividend payments. Preferred stock is often considered to be classified as providing fixed income investment opportunities rather than long-term capital gains. As a result, most of the time when an investor purchases preferred stock, they do so to take advantage of the dividend payments for short-term income.
Keep Your Financial Goals In Mind When Choosing Investment Options
When looking at various investment strategies, incorporating both common stock and preferred stock could be viable options for your portfolio. Diversity is always important to prioritize so you can take advantage of short-term financial opportunities as well as focus on long-term wealth building. The percentage you allocate to either common stock or preferred stock depends on your risk tolerance and what your other investments entail. Every portfolio is different, so remember to keep your financial goals in mind to help you decide between common stock and preferred stock.
Stock Investing Info enjoys helping both new and experienced investors make the best decisions based on their individual needs and goals. It can be overwhelming to choose the right investment strategies since there are so many different ways to look at investing. When it comes to stock market investing, understanding the details like the differences between common stock and preferred stock can go a long way in helping you achieve financial success. Don’t hesitate to contact us at any time if you have any additional questions about these aspects or if we can help you manage your investment portfolio in any way.