Question

what is the difference in preferred stock and common stock? Please provide a pro and con of each type of stock

Answer 1

The difference between preferred and common stock are as under:

1. Common stock carry voting rights in decision making for the Company whereas preference stock does not carry any such voting rights;

2. Preference stock receive dividends prior to common stock.

3. Preference stock receive dividends at a fixed rate whereas common stock receive dividends as per profit availabilty.

4. Preference stock receive capital payment prior to common stock at the time of winding up whereas common stock receive their payment at last once all the liabilities and payables of the Company have been discharged.

Pros and cons of Common Stock:

1. Pro : They carry voting rights which means that common stockholders have a right to participate in management decision making;

2. Con : They do not have any fixed dividend payout. They will receive dividend only if company earns profit and that too once dividend to preference stockholders has been paid out.

Pros and cons of Preferred Stock:

1. Pro : They receive fixed income when the company earns profit;

2. Con : They have no right to participate in the decision making of the Company which means that they cannot control any good or bad decision which the company intends to make which might affect the profitability of the Company and ultimately their dividends.