Question

Discuss the differences in Preferred and Common Stock. Give examples of how you would issue the two types in a corporation where you were CEO.

Answer 1

Preference stock
Preference shareholder are the shareholders who has priority over distribution of dividend then the common shareholders.
They have no voting rights in the decision making for the organisation. They have features of both common stock and bond which is a plus point for preference shareholder.
At the time of liquidation, the claim over assets is higher for preference shareholders.
  

common stock
They are generally the owners of the business organisation that take part in governance and management of company.They vote on strategies and corporate policies common for organisation.

Common stockholders receive higher return in long-term.They are reported in the equity section of the balance sheet.
During liquidation, the common stockholders are paid at last after the payment of preference shareholder, debenture holders and debtors in full.

Difference between preference share and common stock

1. Voting right :common stockholders has voting right whereas preference share holders are deprived of voting rights.
2. Dividend : Preferred shareholders are paid fixed dividend where is common stock ok holders are paid from the earning left after all the payments.
3. Claims: During liquidation time the preference shareholders has greater right of claim over common stock.
4. Conversion: preference share capital can be converted into fixed number of common stock whereas common stock don't have this feature.

The issue of preference share capital and common share capital should be done in a manner that the balance is maintained among preference share capital and common share capital in the organisation.

The common share capital liquidates the ownership and management of organisation, which may at time delay the process of decision making.

so to retain the ownership in limited hands another option ( i.e preference share capital option) should be opted by the organisation for the achievement of financial requirements of business.