Question

Describe the pros and cons of common stock and compare to preferred stock. Provide insight as to when one offering may be superior to the other.

Answer 1

List of Pros of Common Stocks

1. Huge Gain Yields
This option should be able to outperform bonds and other investment products. Common stocks should have no limits regarding the money you will gain. Despite the fact that there will always be the risk of losing, you will be guaranteed of earning big.

2. Ideal Investment Option
Using this type of investment, you will be allowed to invest having limited liability. So whatever amount that you have already invested partially will be the only investment that you are going to lose when they will be liquidated. Thus, you will not risk to lose money in excess of the total funds invested.

3. Restricted Legal Liabilities
Having a limited liability in a company, you will not be affected if there are problems arising from the outside of the financial investment of a stockholder. Only those who are running the company are at risk of facing the consequences.

4. Easy Purchase and Sale
As it is a liquid investment, there is always a possibility to sell a portion of that stock any time you want. This is even more possible if you want to increase your stocks. The good thing is that you will be able to purchase at very fair prices.

List of Cons of Common Stocks

1. Investment with High Risk
Investment is always connected to risks in which most of them are linked to common stocks. Basically, they have volatile prices that fluctuate erroneously. Thus, you will end up losing a lot more if you are the kind of person who panics every time the prices will go down and decide to sell some stocks.

2. Inability to Control
Purchasing some stocks from a company is tricky. This is because your success will be dependent on how the business is able to manage its practices and strategies. Since you have a limited view of their books, you will have to do your own research.

3. Get Paid Last
You will only get paid once all the other stockholders will get their shares. As you only reside at the bottom priority ladder, you can only hope that you can get your own after the creditors, employees, and suppliers get theirs.

After learning a few things about common stocks, perhaps you can have an informed decision regarding this matter. After all, you should have the right to choose the type of investment that you would consider worth every penny.

Basis for Comparison	Common Stock	Preferred Stock
Meaning	Common stock refers to the ordinary stock, representing part ownership and confers voting rights to the person holding it.	Preferred stock, represents that part of company's capital that carry preferential right, to be paid, when the company goes bankrupt or wound up.
Growth potential	High	Low
Rights	Differential Rights	Preferential Rights
Return on capital	Not guaranteed.	Guaranteed and that too, at a fixed rate.
Partipation in elections	Entitles a person to participate and vote in the company's meeting.	Does not entitles a person to participate and vote in the company's meeting.
Repayment priority	Payment to common stockholders are made at the end.	Preferred stockholders are paid before common stockholders.
Redemption	Cannot be redeemed	Can be redeemed
Conversion	Not possible	Possible
Arrears of dividend	They are not entitled to arrears of dividend, if skipped in the previous year.	They are entitled to arrears of dividend, if skipped in the previous year.

Key Points

• New share purchase is an important indicator of current shareholder belief in the health of the company and long term prospects for growth.
• Current Shareholders will often have preemptive rights that give them the right to purchase newly issued company shares before they go on sale to the general public.
• New shares can be purchased on exchanges, which offer a platform for the financial marketplace.

Key Terms

• Stock Exchange: A form of exchange that provides services for stock brokers and traders to trade stocks, bonds and other securities.
• Preemption: The right of a shareholder to purchase newly issued shares of a business entity before they are available to the general public so as to protect individual ownership from dilution.