Question

1. Name the primary characteristics of common stock, as well as the rights and benefits of being a common stockholder.
2. Name the primary characteristics of preferred stock, as well as the rights and benefits of being a preferred stockholder.

Answer 1

Defination of comman stock

Common stocks can be defined as securities that represent individuals’ ownership in a said corporation and their claim on the venture’s accrued profits.

Characteristics of comman stock

Dividend Right – Entitled to earn dividends.

AssetRights – Entitled to receive remaining assets in the event of a liquidation.

VotingRights – Power to elect the board of directors.

Pre-emptiveRights – Entitled to receive consideration.

Rights and benefits of comman stock

Voting rights

Each investor is vested with one voting right per share of common stock held. Notably, such rights pertain to corporate policies and partaking in business decisions

Potential profits

In terms of performance, common stocks are known to generate higher returns than deposit certificates, bonds, etc. among other investment tools.

Limited legal liabilities

Being passive holders, the obligations of common stock investors are limited as well.

Defination of preferred stock

Preferred stock provides a fixed dividend, so it is like bonds that provide interest, but it is also a stock, so there is no requirement to pay the dividend or to buy back the preferred stock. A company may choose to issue preferred stock, rather than bonds, because the dividend payment can be discontinued when cash flow problems arise.

Characteristics of preferred stock

Dividend and yield - The preferred stockholder will receive dividends every year when the board of directors declares a dividend.

Voting rights - Preferred stock carries no voting rights, even though it is part of the equity of the company. This means that preferred shareholders cannot vote for the board of directors of the company or vote on major proposals requiring stockholder approval.

Dividend preference - One of the advantages of preferred stock is that the payment of dividends has a preference over payment of dividends on common stock.

Rights and benefits of preferred stock

Fixed income - This means when dividends are announced, the payments will first have to be made to preference shareholders and only then to common shareholders.

Security in case of winding up - Also in the case of winding up of a company, it is the preference shareholders who have priority in claiming the company assets. Only after the obligations to Preference shareholders are fulfilled will the obligations to common stock begin.

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