Preferred Stock

Preferred Stock is referred to as preferred, because there is a higher claim against the stock than common stocks. There is a difference from preferred stocks and common stock when it comes to their dividends and liquidation. A preferred stockholder would receive their dividends sooner than common stockholders. This makes it so that if a preferred stockholder were to decide to opt out of paying their dividends than the common stock will not have a dividend. “The best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation).” (http://www.investopedia.com/terms/p/preferredstock.asp) Some of the features of preferred stock would be the option for a company to change their preferred stocks into shares for the company’s common stock. This is good, but also bad for investors. With this option of conversion the initial price is high, but it also opens up an opportunity for selling. If the price for a company’s common stock were to rise than they might sell out real fast to create a capital gain. When a company does not pay their dividends, they begin to go into debt with the shareholders. This feature makes it so that the company has to pay the entire amount of preferred stock. The last feature I found to be good is that investors are able to receive partial earnings of what is left after the preferred dividends is paid. This is good for the investors, but not for the common stockholders. Common stockholders will not have the opportunity for these extra earnings. I personally would go with common stock, because I like to watch the growth of the stocks and researching their trends. If it was my deciding for a company I would go with preferred stocks, because there is a variety of potential in capital gain.

Reference: 1. http://faculty.washington.edu/ezivot/econ422/Security%20Valuations_Stocks%20EZ.pdf 2.