What is the difference between common stock and preferred stock?

Preferred stock typically has priority over common stock in dividend payments, which is a fundamental characteristic distinguishing the two types of equity securities. This means that if a company declares dividends, preferred shareholders will receive their payments before any distributions are made to common shareholders. In the event of a company’s liquidation, preferred shareholders also have a higher claim on assets compared to common stockholders, further reinforcing their priority.

This preference for dividends makes preferred stock an attractive option for investors seeking income stability, as they are typically paying at a fixed rate. Common stock, on the other hand, does not guarantee dividends and their payments can vary based on the company's performance and decisions made by its board of directors. This difference in treatment of dividends fundamentally affects the risk and return profiles of the two stock types.