Question

Which form of stock is a better investment for shareholders -- common or preferred? State your reasons as if you were trying to inform someone which type of stock to invest in.

Answer 1

Please find below solution ... let me know if you need any clarification..

Common stock and preferred stock has different risk and reward. While Common stock enjoy higher reward compared to preferred stock but it has higher risk involved.

Common stock are eligible for higher dividend if company is growing at good rate while preferred stock will have only fixed dividend income. If company is making losses or less profit there can be situation that common stock will not be getting dividend but preferred shock holder will get dividend.

Common stock enjoy right to vote while this right is not available to preferred stock.

If investor is able to take risk for good reward common stock is more suitable compared to preferred stock.

If investor is risk averse preferred stock is more suitable compared to common stock.

My advice is there should be diversification of portfolio by which investor should invest some part in common stock and some part in preferred stock based on his risk taking ability.