The distinction between common and preferred stocks in the UK

46

The UK stock market provides investors with two main types of stocks to invest in – common and preferred. Common stocks are the more traditional type of equity investment typically associated with higher risk and potentially more significant returns. Preferred stocks, on the other hand, offer a fixed dividend rate for a specific period but often come with less potential for capital appreciation than common stocks.

This article will explore key differences between these two types of investments to help investors decide which suits their needs best. If you want to start trading UK stocks, you can check out Saxo Markets.

Risk

Common stocks carry a much higher risk than preferred ones, as they generally do not make fixed payments or guarantee any return on investment. Also, since common stock prices fluctuate wildly, investors can lose some or all of their investments if the stock price suddenly drops. Preferred stocks are usually less risky due to their fixed dividend payments and generally more stable prices.

Dividends

Preferred stocks offer a fixed dividend rate for a specified period that is often higher than the dividend rate on common stocks. Common stock dividends, however, are not guaranteed and may change from year to year based on the company’s profits and performance.

Ownership rights

Common stockholders typically have more ownership rights than preferred shareholders. These include voting rights in shareholder meetings and the ability to elect board members who will make decisions regarding the company’s operations. Preferred stockholders, on the other hand, do not typically have voting rights and cannot participate in major corporate decisions.

Liquidity

Common stocks are usually more liquid than preferred ones, as traders can sell them quickly and easily on a stock exchange. For example, it is relatively easy to buy and sell common stocks on the London Stock Exchange. Preferred stocks, however, may be difficult to trade due to their illiquidity, as there is often less of a market for them.

Taxation

Preferred dividends are generally taxed at a lower rate than common dividends in the UK due to their fixed-rate nature. HMRC treats common dividends as regular income and thus subject to income tax.

Price

Common stocks are usually more volatile, and thus their prices can change significantly over a short period. Preferred stock prices, however, remain relatively stable due to the fixed dividend payments that come with them, which makes them less prone to market fluctuations than common stocks.

Conversion rights

Preferred stocks may include conversion rights which allow the holder to convert the preferred stock into a certain number of common shares at a predetermined price. It can benefit investors who want access to the potential upside of owning both investments without buying them separately.

Call protection

Preferred stocks usually have call protection which means that the company cannot call them back (repurchase them from the shareholder) until a specific date or event has occurred. It can be advantageous for investors looking for more security and stability in their investments as it adds an extra layer of protection against losses.

Priorities

In the case of bankruptcy, common stockholders have lower priority than preferred shareholders regarding receiving payment for their investments. Therefore, preferred stockholders will receive payments before common stockholders if the company goes bankrupt.

Voting rights

Common stockholders typically possess voting rights that allow them to participate in important decisions regarding the company’s operations. Preferred shareholders, however, do not usually have voting rights and cannot participate in major corporate decisions such as electing board members.

Par value

Common stocks have a par value, the price at which they are issued initially, and usually a small amount, such as £1. Preferred stocks also have a par value, typically much higher than common stock. However, these are just general values, and individual stocks may differ in prices.

Cumulative vs non-cumulative dividends

Preferred stocks can either be cumulative or non-cumulative. A cumulative preferred stock requires the company to pay all unpaid dividends before any common dividends can be paid out, while a non-cumulative preferred has no such requirement. It provides an added layer of security for investors in the case of dividend cuts or suspensions from the issuing company.