Analyzing Preferred and Common Stock Research Paper

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Stock

Common vs. Preferred Stock

Preferred and common stocks are different in two key aspects.

Firstly, stockholders who are preferred have a bigger claim to organizational earnings and assets. This holds true in good times, i.e., when the firm possesses excess money and decides upon distributing it as dividends to company financiers. In such cases, during distributions, preferred stockholders are to be paid prior to common stockholders. But the claim of preferred stockholders is most crucial, if the organization goes insolvent, when it's common stockholders that come last in claiming company assets. That is, if it comes down to liquidation and paying of all bondholders and creditors, common stockholders receive nothing, unless all preferred shareholders receive their due (Bratton & Wachter, 2013).

Secondly, preferred stock dividends differ from, and are generally higher than common stock dividends. When purchasing preferred stocks, the investor will know when a dividend is to be expected, as these are paid out regularly. However, this doesn't necessarily happen with common stock, since the directorial board of the organization has the authority to decide whether to pay common dividends or not. Owing to this characteristic, normally, preferred stocks do not fluctuate with the same frequency as common stocks do, and can, at times, be categorized as fixed-income securities. To add to preferred stocks' fixed-income nature, dividends are generally, guaranteed, i.e., if the organization misses one, it has to disburse it prior to disbursing any further dividends on either of the two stocks (Bratton & Wachter, 2013).

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But there are a few situations wherein common stock owners have more rights compared to preferred stock owners. Chief among these situations is: common stockholders generally have voting rights with regard to board decisions or corporate policy, while preferred stockholders don't. Preferred stocks are associated with the advantage of lesser volatility compared to common stocks; however, with regard to potential appreciation, preferred stockholders have a relative disadvantage. Organizational achievements (like a major acquisition or innovation), or events leading to skyrocketing of common stock prices, can have a relatively smaller impact on the value of preferred stock. Thus, growth investors might not be drawn to the idea of holding preferred stocks of a company. But, income investors typically prefer the stronger position of fixed income that preferred stocks offer (Schowitz & Albrecht, 2014).

Much of preferred stock can be redeemed or repurchased by the organization, normally after some specific date; i.e., it is callable. Hence, unlike common shareholders, those holding preferred stocks might need to surrender investments before they wish to, as well as in a manner that stops them from the realization of some of their expected income from stocks (Schowitz & Albrecht, 2014).

Why would an investor (current investor) have a negative reaction to the issuance of additional shares of common stock?

If some new constituent….....

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