Business Finance
business and finance question

Question Description

explain why preferred stock is referred to as preferred and what some of the features added to preferred stock are that make it more attractive to investors. Would you select preferred stock or common stock as an investment? Why?

Final Answer

Common stocks are basically stocks that entitle the shareholders to voting rights that can be used in making certain decisions made by the company or business. Common stocks are usually cheaper than preferred and offer less dividends than preferred stocks. Common stocks may or may not receive a dividend depending on what the board of directors of a company decides. Usually, common stocks are may be more variable and volatile, while preferred stocks are more stable. Sometimes, for this reason, preferred stocks are often considered as fixed income, as their dividends are guaranteed.

Preferred stocks on the other hand do not have any voting privileges. Rather, preferred stocks guarantee dividend payments to stakeholders before common stakeholders receive their dividend payments. This is usually really important when a company liquidates assets. In these scenarios, common stock holders will receive dividends last, so in many instances they may get a piece of the pie. However, preferred stock holders don't have to worry about this because they have priority on the dividend payments. These stocks usually offer greater claim of a company's revenue.

Prashant S (1995)
Boston College

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