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 preference over the other in case of a bankruptcy and when dividends are declared by the board of directors? Describe which of the two securities have the highest 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 (interest rates) and stock values? What is the relationship between dividends and stock values?

Explanation / Answer

Common stock :- Common stock represents the half ownnership interest in the company. These stock are generally called as Equity shares or ordinary shares.These stockholders have claim on the assets and earning of the company

Preferrence stock:-  Preferrence stock are the holder who gets the fixed rate of dividend prior to common stockholders (have preferrence over Common stock). Their claim on the assets and earning is higher than common stockholder.

Earn a return from Common stock And Preferred Stock:-  Common stockholder earns dividend through Earning pe share (net earning available to them after paying off Debt's interest , income tax and preferrence dividend and divided by number of shares outstanding at end)

Preferrence stock dividend is calculated through a fixed rate mentioned at the time of issuing of stock / shares

Note;- fixed rate of dividend is on net earning after tax .

Preferrence over than in case of bankruptcy and When dividend are Declared :- Preferrence stockholder has high preferrence ove Common stockholder while paying dividned and bankruptcy and other liability which is being paid off, because their claims are higher than commonstockholder in the company

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