Discuss the similarities and differences between common stock and preferred stock. Which type of stock wo?
Discuss the similarities and differences between common stock and preferred stock. Which type of stock would you prefer to own? Why?
When and why do corporations issue common and preferred stock?
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Answer by cactusgene
Preferred stock earns a pre-determind rate of dividend (say 5% of par value), but can never earn more even if the company does super well. They will be paid their dividend in full before the common stockholders get anything. If the company is dissolved the preferred stockholders will be paid before the common shareholders.
Conversely, the common shareholders fully participate in the growth of the company and possibly enjoy higher dividends year after year, which is not the case for preferred whose rate is fixed for life. If the company gets bought in a merger or acquisition, the preferreds are paid out at the par value, while the common is usually paid a premium over their current market value.
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