In Australia, common stocks have been listed on a stock exchange and bought and sold through brokers on the capital market. For example, a company may first be established as a private company by its owner(s), or it could also be an existing public company that has decided to list some of its shares for sale on a stock exchange.
Either way, after listing its shares, a corporation can raise money by selling equity by offering new shares at market price (e.g., via an initial public offer) or from existing shareholders who wish to sell their shares. In this way, new buyers receive the right of ownership over the corporation’s assets and earnings. At the same time, sellers no longer need to bear sole responsibility for the risk and rewards of ownership.
As a result, common stocks usually carry no fixed maturity date, and holders of common stock are not entitled to any guaranteed dividend. However, the corporation does list out the amount of dividends it intends to pay (if at all). That figure is then divided evenly among each share (usually determined by the number of shares owned, unless otherwise specified).
Preferred stocks do not have voting rights and are usually paid at a fixed dividend. They may or may not be transferable but do payout before common stockholders in the case of a liquidation.
These shares are also known as ‘preference shares’ in Australia. They exist as a hybrid between debt and equity instruments – that is, they possess some characteristics similar to bonds (debt) and shares (equity). For this reason, they are often called hybrid securities.
As it stands, preferred stocks carry no risk of dilution from new share issuance so long as the corporation remains profitable. That is to say; there is no chance of the company issuing new preferred stocks at an undesired time and thus diluting the value of each share held by investors (the same cannot be said with common stocks).
You can trade both stocks with Saxo.
Preferred stocks are considered income for US tax purposes. Meaning investors will be required to pay taxes on their dividends whether or not they are reinvested. In contrast, common stock dividends are taxed at the lower qualified dividend rate (provided specific criteria is met).
Common stockholders own an actual share of the company and therefore have voting rights in minor issues (e.g., the election of board members) and larger ones (e.g., deciding on a merger). Preferred stockholders don’t have any voting rights unless specified by the corporation.
When a company is liquidated or bought out, it must pay all outstanding debts before distributing any remaining assets to shareholders. Any outstanding debts are paid off first, then preferred stockholders get their money before common stockholders. However, some claims against the company may be so small that they are not enough to cover administrative costs. These claims are called ‘junior’ or ‘subordinated’ claims, and although their holders still stand in line behind preferred stockholders for payment on liquidation, they can never receive more than the par value of the claim.
The rate preferred stocks pay dividends is set by the contract with shareholders (depending on the terms). Common stocks often have an annual dividend, but management usually decides based on how profitable the business is each year. Preferred stocks typically pay out a fixed dividend, whereas common stock dividends may rise and fall based on the company’s earnings.
Common stockholders have voting rights for most decisions made by the corporation. They can decide important issues such as the election of new board members, mergers and acquisitions, expansion plans, etc. Preferred investors don’t have any voting rights unless specified by the corporation.
Preferred stocks are often non-transferable, which means they cannot be bought or sold on the open market with ease (the company may agree to repurchase them, but this is usually at a reduced price). Common stocks are generally freely transferable on the open market without hindrance from the company.