What distinguishes preferred stock from common stock?

Preferred stock is characterized by several distinct features that set it apart from common stock. One of the most important distinctions is that preferred stock typically comes with fixed dividend payments, which are set at the time of issuance. This provides preferred shareholders with a reliable income stream, as these dividends must be paid before any dividends are distributed to common shareholders. Additionally, in the event of a company being liquidated, preferred stockholders have priority over common stockholders when it comes to asset claims. This means that if a company goes bankrupt, preferred shareholders are more likely to recover some of their investment before any assets are distributed to common shareholders.

In contrast, common stock does not offer the same guarantees regarding dividends, which can be variable and will only be paid if declared by the company's board of directors. Common shareholders also have voting rights, which preferred shareholders typically do not have. However, these voting rights are not linked to the financial recovery aspects that preferred stockholders enjoy in times of liquidation. Understanding these key characteristics helps investors make informed decisions about their investment strategies and risk tolerance when distinguishing between these two types of stock.