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Common stock and preferred stock are similar in a number of ways — they both entitle the holder to some ownership of the company, they're both traded on the open market and the process for acquiring both types of stock is very similar. 

Despite these similarities, the differences between each type of stock are as follows. 

Common stock

As its name suggests, common stock is usually the type of stock you purchase when trading unless otherwise specified. Owners of common stock make the most money when they sell their holdings.

Common stocks are considered riskier than preferred stocks because they are highly volatile and not guaranteed to return dividends.

Preferred stock

Preferred stock carries less risk than common stock because it receives higher and more frequent dividends. Unlike common stockholders, preferred stockholders receive fixed dividends on a predetermined schedule, and these dividends are not subject to the ebb and flow of the general market.

If a company declares bankruptcy, preferred stockholders will receive payouts before common stockholders. However, preferred stock may be 「callable」, meaning that the company can purchase the stock back at any time, for any reason.

Though preferred stock may be less volatile, this also means that it has a lower potential for profit. Preferred stock options are usually a better idea for investors closer to retirement or those with lower risk tolerance. 

Differences between Common Stocks and Preferred Stocks

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