What is the difference between common equity and preferred equity?

Common equity and preferred equity are two distinct types of equity ownership in a company, each with its own rights, characteristics, and implications for investors and the company. Here are the key differences between common equity and preferred equity:

1. Ownership and Voting Rights:

   • Common Equity: Common equity represents common shares or common stock in a company. Common shareholders have ownership rights in the company and typically have voting rights, allowing them to participate in corporate decisions and the election of the board of directors.
   • Preferred Equity: Preferred equity represents preferred shares or preferred stock. Preferred shareholders usually do not have voting rights or have limited voting rights. They may not participate in some corporate decisions and generally do not have a say in the appointment of the board of directors.

2. Dividends:

   • Common Equity: Common shareholders may receive dividends, but these dividends are typically discretionary and can vary based on the company's financial performance and decisions by the board of directors.
   • Preferred Equity: Preferred shareholders have a preferential claim to dividends. They are entitled to receive dividends before common shareholders, and the dividend rate is often fixed or calculated as a percentage of the face value of their preferred shares. This preference for dividends is a key feature of preferred equity.

3. Distribution of Assets in Liquidation:

   • Common Equity: In the event of the company's liquidation or bankruptcy, common shareholders have a residual claim on the company's assets. They receive their share of assets remaining after satisfying the claims of creditors and preferred shareholders.
   • Preferred Equity: Preferred shareholders have a senior claim on the company's assets in the event of liquidation. They receive their share of assets before common shareholders, which provides some level of protection for their investment.

4. Risk and Return:

   • Common Equity: Common shareholders typically have a higher risk-reward profile. They have the potential for higher returns through capital appreciation and the possibility of receiving dividends, but they also bear more risk, as they are the last in line to receive distributions in case of financial distress.
   • Preferred Equity: Preferred shareholders have a more predictable and stable stream of income through fixed or predetermined dividends. However, their potential for capital appreciation is often limited compared to common shareholders, and they have less influence over the company's operations.

5. Convertible Features:

   • Common Equity: Common shares typically do not have convertible features, meaning they cannot be converted into other types of securities.
   • Preferred Equity: Some preferred shares may have convertible features that allow them to be converted into common shares at a predetermined conversion ratio. This feature can provide preferred shareholders with an opportunity to participate in potential future gains in the company's common equity.

6. Callability:

   • Common Equity: Common shares are not callable, meaning the company cannot force common shareholders to sell their shares back to the company.
   • Preferred Equity: Some preferred shares may be callable, allowing the company to redeem them at a predetermined price or on specified dates. This callability can impact the preferred shareholder's ability to maintain their investment.

It's important to note that the specific rights and features of common and preferred equity can vary from one company to another and may be outlined in the company's articles of incorporation and shareholder agreements. When considering equity investments, investors should carefully review the terms and conditions associated with the specific type of equity being offered.