A common stock account refers to a financial assets account that contains common stock shares in a publicly traded company, which has several distinctions from that of preferred stock which is also generally offered for sale by publicly traded companies. While common stock costs less per share to buy than preferred stock, this does not mean that it has universally inferior qualities. For instance, anyone who holds common stock in a company has both direct and proxy voting rights as to what decisions the company makes about its future, while this is not true of preferred stock which traditionally carries no voting rights with it.
A shareholder's common stock account does have certain limitations over that of preferred stock. One of the main drawbacks to common stock arises if the firm gets into financial trouble. If the company goes bankrupt and cannot pay off all of its creditors, bond holders are paid off first, then preferred stock holders, and common stock holders are last in line to be reimbursed for their investment. This often means that when a public company goes out of business, a common stock account can end up being worthless.
Another feature of common stock involves dividend payments. If the company regularly issues dividends to its stockholders on a quarterly, semi-annual, or annual basis, these dividends are first paid to preferred stock holders and then to common stock account holders. If dividend payment schedules are missed by the firm, the preferred stock holder is always first in line when they become available over that of the common stock holder. This means that if there is a shortfall in dividends for any reason, the preferred stock account is still owed them by the company, but the common stock account has no inherent right to them.
In theory, both a common stock account and preferred stock account are forms of an equity account that have a net value after all debts and liabilities are subtracted if the firm is liquidated. In practice, however, preferred stock has much more of a guarantee of repayment and is financially closer to a bond in nature than it is to the common stock itself. Preferred stock is often marketed to large institutional investors and wealthy individuals who are willing to pay a premium price for some increased security on their investment, while common stock is issued and promoted to the general public which tends to be more interested in bargain prices.
