What about investing in stocks?

Stocks, also known as shares or equity, represent ownership in a company.  When you purchase a stock, you become a shareholder in that company, and you own a portion of that company’s assets and profits.  Stocks are traded on stock exchanges, such as the New York Stock Exchange (NYSE) or NASDAQ.  A stock’s value can fluctuate based on a variety of factors, which include a company’s performance, economic conditions, and investor sentiment.  There are multiple types of stocks, but the two most common are common stocks and preferred stocks. 

Common Stocks

Common stocks represent ownership in a company, which entitles the shareholder to vote on corporate matters, such as the election of board members and major business decisions.  Common stockholders also have the potential to receive dividends if the company decides to pay them, but this is not guaranteed.  Common stockholders are at the bottom of the priority list when it comes to receiving payouts in the event of bankruptcy or liquidation.

        Advantages

• • • Higher return potential. The value of common stock can increase over time and the company might pay dividends to shareholders.
    • Voting rights. Common stockholders have the right to vote on important company decisions, which means they effectively have a say in the company’s direction.
    • Since common stock can be bought and sold on stock exchanges, it can be more liquid than other investments.
    • Ownership of the company. Common stock offers a direct ownership stake in the company and the investors can share in the company’s profits and growth. 

        Disadvantages

• • • High risk. It should come as no surprise that higher returns means higher risk.  Common stock is considered more volatile than preferred stock, which means that the value of the investment can fluctuate more significantly in response to changes in the market.
    • Lower priority for dividends. In the event of a company’s liquidation or bankruptcy, common stockholders are typically paid after preferred stock and debt holders.
    • No fixed income. Unlike bonds or preferred stock, common stock does not offer a fixed income stream.  Dividends might be paid out irregularly or not at all and there is no guarantee of capital appreciation. 

Preferred Stocks

On the other hand, preferred stocks represent a type of ownership that usually does not include voting rights but comes with a fixed dividend payout that is usually higher than the dividend payout for common stock.  Preferred stockholders are also higher on the priority list than common stockholders when it comes to receiving payouts in the event of bankruptcy or liquidation.  However, preferred stockholders typically do not get the same potential for capital gains as common stockholders because the price of preferred stock tends to be more stable. 

        Advantages

• • • Preferred stocks receive higher priority for dividends. They are paid out before common stockholders, which means they have a more predictable stream of income.
    • Lower volatility. Preferred stock is generally less volatile than common stock because its value is tied more to the company’s performance than market fluctuations.
    • Potential for higher yields. Preferred stock can offer higher yields than other investments, such as bonds, which makes it attractive to income seeking investors.

        Disadvantages

• • • Lower potential returns. Preferred stock typically offers lower potential returns than common stock since the dividends are fixed and do not increase even when the company performs well.
    • Interest rate risk. Since preferred stock behaves more like a bond, it is subject to interest rate risk.  If interest rates rise, the value of preferred stock might decline.
    • Call risk. Preferred stock might be callable, which means that the issuer can choose to redeem the stock before it reaches maturity.  This can be disadvantageous to investors if the stock is called in when interest rates are lower than when it was first issued.

It is important to note that there are other types of stocks, such as dual-class stocks, but we focus on common and preferred here because they are the most common.