Business Practices

What is preferred stock vs. common stock?

Preferred Stock

Preferred Stock is typically sold to investors. This type is called “preferred” because it has additional rights attached to it, like voting on certain corporate governance matters and selecting board members. Preferred Stock is also first in line for payout, which is known as a liquidation preference; upon an exit those who own Preferred Stock are typically paid out first (before those who own Common Stock).

Common Stock
Common Stock is for employees, though some investors buy Common Stock too. Since Common Stock doesn’t have additional rights or liquidation preference, it’s seen as less valuable (while the company is still private) and it’s priced at a discount to the Preferred Stock. When a company goes public, Preferred Stock is typically converted into Common Stock. The result is one type of stock, with one price, that anyone can buy or sell on a public stock exchange.

This article provides general information and shouldn’t be construed as tax, benefits, legal, or HR advice. Rules and regulations may change over time and may vary by location. So, please consult an appropriately certified expert (such as a lawyer, CPA, tax advisor, licensed broker, or HR expert) for advice specific to your circumstances.