Question

Write a paragraph discussing the differences between common stock and preferred stock from the investor's perspective for this company. Comment specifically on dividends, potential for the future increase in share price and risks.

Thanks,

Answer 1

Common stock provides equity ownership in a corporation. That is the owner of a common stock has an interest in the assets of the corporation and a share in the earnings.  

Preferred Stock on the other hand also provides partial ownership in a corporation. however , there are some important differences. To a degree, preferred stock is more similar to bonds than to a common stock . For that reason , preferred stock often is described as a hybrid form of security having characteristics of both debt and equity.

Common stock has no guarantee that an investor will make money. The equity position in a common stock means that the owner shares in corporation's fortunes and misfortunes.

Preferred stock usually offers a fixed dividend . The dividend amount does not fluctuate based on earnings. Term Preferred also implies that shareholders have a right to receive their specified dividend before common stockholders are paid any dividends.

Returns for a common stock can vary. no dividends can be paid and in some years more dividends can be paid than a previous year.

Common stock has three potential valuation scenarios. Over time , dividends may remain fixed , growth a constant rate and grow at an unusual rate.

Preferred stock pays a fixed dividend at the end of each year , valuation is determined as shown

V= D/ k. Where V= Market value of preferred stock. D= Constant annual dividend . k= discount rate.