2.12:
Common Stock vs. Preferred Stock
Stocks symbolize a proportional stake in the issuing company, reflecting the holder's partial ownership. They are primarily categorized into common stock and preferred stock.
Take Salt Corporation as an example.
The corporation issued common stocks five years ago, giving shareholders ownership stakes with the potential to reap higher returns.
Owners of common stock are granted voting rights, allowing them to participate in the corporation's decisions.
Common stock returns are not fixed and depend on profits and management decisions. The main attraction lies in the growth potential as their price keeps fluctuating in the stock market.
As they face market volatility, common stock involves higher risk.
The corporation decides to raise further capital and issues preferred stocks. These stockholders enjoy priority in dividends and liquidation, providing a stable income.
The preferred stockholders get a share of ownership without conferring significant decision-making authority.
Preferred stock appeals to investors seeking reliability with lower risks and fixed returns.
During bankruptcy, preferred stockholders will have a claim on the Salt Corporation's assets before common stockholders.
2.12 Common Stock vs. Preferred Stock
Beyond the primary differences, several additional distinctions between common stock and preferred stock are essential to understand.
Dividends for preferred stock are usually fixed and take precedence over common stock dividends, making preferred stock appealing for steady income. Common stock dividends generally vary based on the company's profitability. Voting rights are generally granted to common stockholders, allowing them to participate in corporate matters such as electing the board of directors. Preferred stockholders typically lack these rights, limiting their influence.
Certain preferred stocks may be converted into a specified number of common shares, providing potential benefits if the company's common stock performs well. Cumulative preferred stock accumulates unpaid dividends, which must be paid before dividends are paid to common stockholders. Non-cumulative preferred stock lacks this feature.
Participating preferred stock may receive additional dividends if specific financial goals are met, offering extra income beyond fixed dividends. This benefit is not available to common stockholders. In the event of liquidation, preferred stockholders have seniority over common stockholders, ensuring they are paid from remaining assets first and thereby reducing their risk.