Question

Explain the difference between common and preferred stock? List the advantages and disadvantages of each.

Answer 1

With common stocks, when a company makes a profit, stockholders receive payment in dividends. They have the ability to generate greater revenue, but dividends are never guaranteed, so investors need to invest carefully. With preferred stocks, owners receive a share of the company just like common stocks, but there's a fixed yearly dividend. This means that there's a consistent flow of income, which means preferred stocks had less risk than common stocks. However, with preferred stocks if a company has financial difficulties, the stock owner's investment is still tied to the company.

Answer 2

Common stockholders will not receive any money before the preferred stock holders in the case of the company having to liquidate.  So thats a disadvantage.  Preferred stockholders tend to get higher dividends paid out to them, which is an advantage.