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What are preferred stocks and how do they differ from common stocks?

Curious about Securities

What are preferred stocks and how do they differ from common stocks?

Preferred stocks and common stocks are two different classes of shares that companies issue to investors. Here's how they differ:

Preferred Stocks:
1. Fixed Dividend: Preferred stockholders have a fixed dividend rate, which means they receive a predetermined dividend amount per share. This dividend is typically paid before any dividends are distributed to common stockholders.
2. Priority in Dividends: In case of financial distress or dividend cuts, preferred stockholders have a higher claim on the company's earnings than common stockholders. They have priority in receiving dividends over common stockholders.
3. No Voting Rights: In most cases, preferred stockholders do not have voting rights in the company's decisionmaking process. They usually do not have a say in electing the board of directors or other corporate matters.
4. Lower Volatility: Preferred stocks generally exhibit less price volatility compared to common stocks because of their fixed dividend and seniority in receiving dividend payments.

Common Stocks:
1. Variable Dividends: Common stockholders do not have a fixed dividend rate. The dividends they receive depend on the company's profitability and the decision of the board of directors.
2. Voting Rights: Common stockholders usually have voting rights in the company's annual meetings and major corporate decisions. The number of votes is usually proportionate to the number of shares owned.
3. Potential for Capital Appreciation: Common stocks offer the potential for higher capital appreciation compared to preferred stocks. However, they are also subject to higher price volatility.
4. Last in Line for Dividends: Common stockholders are the last to receive dividends after all preferred stockholders have been paid. If the company faces financial difficulties, common stockholders may not receive dividends at all.

In summary, preferred stocks offer a fixed dividend and priority in receiving dividends, but they lack voting rights. On the other hand, common stocks have variable dividends, voting rights, and potential for higher capital appreciation. Investors need to assess their investment objectives, risk tolerance, and income needs when choosing between preferred and common stocks for their investment portfolio.

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