Whether common or preferred shares of stock are more valuable ultimately depends on what the individual investor finds most important when comparing the different characteristics of the two types of investments. Based on monetary values alone, an ordinary, or common share of stock valued at $100 does not intrinsically hold more value than a preferred share with a market price of $100, or vice versa. Much of the distinct value depends on the dividends paid on the preferred share and the projected future earnings possible on the common share of stock
Preferred stocks share some characteristics with bonds and some with common stock. Because of this, they can be classified as a type of annuity. Preferred stocks pay a set dividend, usually quarterly, similar to the coupon or interest payment on bonds. Owners of preferred stocks hold claims on a firm's assets like shareholders of common stock. Like other annuities, preferred stock shares pay regular payments. Because stock shares do not have a maturity date, a preferred stock is known as a perpetuity, meaning it pays indefinitely.
Features of Common Stock
Shareholders of common stock, although subordinate to bondholders and owners of preferred shares when it comes to claims on a firm's assets, hold exclusive rights. Stockholders of ordinary shares of a publicly owned company hold voting rights and entitlements to all remaining assets of the firm after creditors' claims have been settled. Ordinary shares hold the potential not only for paying a regular dividend, but also for increasing the wealth of shareholders through capital gains, or the increase in value through appreciation.
Risk vs. Reward
According to Jennifer Schonberger, writing in the April 2011 issue of "Kiplinger's Personal Finance" magazine, preferred stocks pose less risk for the investor than do common shares. But preferred stocks also provide less chance of gains through appreciation. Schonberger cites inflation and interest rate increases as threatening the predictable return on preferred shares. A comparison of value in this sense then can be made between regular dividends and potential capital gains.
As a broad measure, no significant valuation can be supposed for common vs. preferred shares. Just like all investment products and other monetary assets, the real value equals the present value of all future returns. Firm-specific risk, the chance of loss particular to a specific company, figures prominently in the valuation process, and although we can compute valuations of individual assets, the volatility common stock undergoes over time simply cannot be predicted with any assured accuracy. Thus, when comparing the value of ordinary shares with preferreds, an evaluation must be done for specific stocks based on what the investor seeks.
- "Investment Analysis and Portfolio Management"; Fifth Edition; Frank K. Reilly and Keith C. Brown; 1997
- "Kiplinger's Personal Finance"; Preferred Stock; Jennifer Schonberger; April 2011
- Standard & Poor's: Preferred Stock Primer; March 2009
- UMass Lowell: Common Stock and Preferred Stock
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