Distinguish between preferred stock and common stock. Compare valuing preferred stock and common stock.
Distinguish between preferred stock and common stock
Common stocks allow people to invest in a company and gain rewards, in the form of dividends, as company’s share prices rise. Owners of common stock are allowed to participate in corporate decisions. However, if a company preforms poorly, common stock holders will lose their initial investment.
Preferred stock are similar to common stock because these are also ownership of a company. But, they differ in the way that preferred stock holders are paid a predetermined dividend amount, not bases on the companies performance. These dividends are typically at a higher price than those of common stock’s dividends.
Moving on to stocks, common stocks are, as the name implies, the most common stock available to investors. They deliver on the appreciation of a business’s growth in value, and often pay out dividends to stockholders. They also typically afford the stockholder the right to vote on issues in the company, as they are partial owners of the company. Preferred stock, on the other hand, typically does none of those things. Instead, they tend to have specific payment terms, set interest rates, and don’t fluctuate with the rises and falls of the company. They are also paid out before common stocks, and in the case of companies creating more stocks or going bankrupt, preferred stockholders have access to new purchases or payouts before anyone else. Preferred stocks are much less risky, but have fewer rewards in a company that takes off. Common stockholders, in turn, take on more risk and gain more power because of it, by being able to participate in the running and growth of the business (Glen, 2017).
Keown, Auther; Martin, John; Petty, J. William. Foundations of Finance, 8th Edition. Pearson Education, Inc. 2014.