Define common stock and preferred stock. How does common stock earn a return (2

Question

Define common stock and preferred stock. How does common stock earn a return (2 ways)? How does preferred stock earn a return (one way)? Which one has a preference over the other in case of a bankruptcy and when dividends are declared by the board of directors? Describer which of the two securities have the highest earnings potential and why? Which of the two securities (common stock and preferred stock) command a higher required rate of return and why? What is the relationship between required rate of return (interest rates) and stocks values? What is the relationship between dividends and stock values?

Explanation / Answer

1) Common Stock holders have certain percentage of ownership in the corporation. Preferred stoc k holders too have ownership but they are given more preference over common stock holders.

COmmon stock holders get returns in the form of dividend when comoany makes extra profits.

Preferred stoc k holders not only get fixed dividends but alkso extra dividend when company performs well.

During bankruptcy preferred stock holders are paid first after debtors and common stock holders are paid last.

Preferred stock have higher earning potential since they are ensured of getting dividend.

Common Stock requires higher rate of return because only when the rate of return is higher the common stock holders get their dividends.

The greater the rate of return the greater is the stock value. This denotes sign of prosperity and growth for the company.

Stock price and dividend are inversly related. Once the company pays dividend people are less inclined to buy that stock since the next dividend will be expec ted after long time.

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