Final answer:
A preferred stockholder can hold their stock by earning regular dividends or by selling it on the secondary market for a profit.
Step-by-step explanation:
A preferred stockholder can hold their stock in two ways:
- Hold it for the long term and earn regular dividends. Preferred stockholders have priority over common stockholders when it comes to receiving dividends. They typically receive a fixed dividend payment at regular intervals.
- Sell the stock on the secondary market for a profit. Preferred stock can be bought and sold on stock exchanges just like common stock. If the stock increases in value, the stockholder can sell it for a capital gain.
Preferred stockholders can hold their stock by earning dividends or by selling the stock for a higher price than the purchase price, thus realizing capital gains.
There are two main ways a preferred stockholder can hold their stock and expect to receive a rate of return. The first way is through the receipt of dividends, which are direct payments made by the firm to its shareholders. These payments represent a share of the company's profits and provide income to stockholders. The second way is by realizing capital gains,
when the value of the stock increases and the stockholder sells their shares for a higher price than the initial purchase price. For example, buying a share of stock at $45 and selling it later for $60 would result in a $15 gain. Hence, preferred stockholders can benefit from the appreciation in stock value over time in addition to potential dividend payouts.