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There are two primary means to earn income as a stockholder. The first method is dividend income and the second method is earnings from capital gains. With respect to the investor seeking dividend income, when the investor buys a stock from a corporation with a primary focus to earn dividend income they will typically expect a higher dividend on common stock versus preferred stock. Discuss the dividend payment requirements of a common stock versus preferred stock, in terms of which type of stock has a primary claim on dividend distributions. Explain why the common stock investor demands a higher dividend rate.
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Common stock versus Preferred stock
Common stocks are most commonly issued shares in the stock capital of the
company. The holder of common stock has proportionate right to vote in the matter and
affairs of the company. Usually, one share of common stock equals one vote. Common
stockholders are partial owners of the company. Apart from enjoying the voting right,
common stockholders also enjoy pre-emptive rights that are to maintain the same
proportions of ownership in the company over time.
Dividends are paid to a company's shareholders from the company's earnings....
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