Rules and Rights of Common and Preferred Stock

Comparing Common Stock, Preferred Stock, and Debt

Equity

Common Stock and Preferred Stock are both methods of purchasing equity in a business entity. Common stock generally carries voting rights, while preferred shares generally do not.

Preferred shares act like a hybrid security, in between common stock and holding debt. Preferred stock can (depending on the issue) be converted to common stock and have access to accumulated dividends and multiple other rights. Preferred stock also has access to dividends and assets in the case of liquidation before common stock does.

However, both common and preferred stock fall behind debt holders regarding claims to assets of a business entity should bankruptcy occur. Common shareholders often do not receive assets after bankruptcy due to this principle. However, common stock shareholders can theoretically use their votes to affect company decision-making and direction in a way they believe will help the company avoid liquidation in the first place.

Debt

Debt can be "purchased" from a company through a bond.

A bond from the Dutch East India Company A bond is a financial security that represents a promise by a company or government to repay a certain amount, with interest, to the bondholder.

In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest and/or to repay the principal at a later date, termed maturity. Therefore, a bond is a form of loan or IOU: the holder of the bond is the lender (the creditor), the issuer of the bond is the borrower (the debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments or, in the case of government bonds, to finance current expenditures.

Bonds and stocks are securities, but the major difference is that (capital) stockholders have an equity stake in the company (i.e., they are owners). In contrast, bondholders have a creditor stake in the company (i.e., they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely.