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In: Finance

“Common stock is the riskiest corporate security, followed by preferred stock and then bonds.” Is it...

“Common stock is the riskiest corporate security, followed by preferred stock and then bonds.” Is it correct,explain in detail

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Expert Solution

Yes, common stock is the riskiest corporate investment security, followed by preferred stock and then bonds.

Common stocks are paid the last in case of a profit or the management can also decide to retain the earnings. Preferred stocks are paid a certain interest rate in case of profits. Bonds have a fixed rate of coupon to be paid even if the company makes losses hence, it is the most secured form of investment out of the three.

Even in case of company liquidation, bond holders are paid the first out of asset liquidation. Preference share holders are paid after them and equity holders are paid the residual amount.

Equity shareholders have the risk of loosing the entire amount of money paid for the share and also have an unlimited upside risk. They are given a share of the company and are part owners.

Preference shareholders do not have any voting rights and a limited upside potential in case of company success. Bond holders do not have any upside risk as their payment is fixed. They only have a risk in case the company defaults.

Hence, it is corretly said that,common commonis the riskiest corporate security, followed by preferred stock and then bonds.

Let me know in the comment section in case of any doubt.


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