When an individual decides to invest in stock of a company, he/she may choose to purchase a common stock. It is often questioned why investors would purchase common stocks at all, given preferred stocks seem to have many benefits. Along with the benefits often associated with preferred stocks, there are also increased risks attached to this type of investment.
When an individual purchases a preferred stock, he/she gives up any right to vote regarding the corporation’s management. A common stockholder has the right to vote on a company’s board of directors. An individual who purchases a preferred stock essentially exchanges his/her right to vote for increased claim to a company’s assets.
Therefore, if a preferred stock holder is unhappy with the way that the current board of directors is operating a company, he/she has no voice in electing a new board. Also, preferred stocks fluctuate inversely proportionately to interest rates.
