Question

6. Explain the differences between preferred stock and common stock. (Module 4 + Stocks, bonds PPT) 7. Discuss the methods the Fed uses to enact monetary policy and provide an explanation of the effects these methods have on the supply of money. (Module 4 + Stocks, bonds PPT)

Answer 1

6. Between preferred and common stock, there are several variations. The key distinction is that preferred stock generally does not grant voting rights to owners, while common stock does, generally at one vote per share. Most investors understand quite a bit about common stock and little about the preferred range. Both types of stock represent a portion of a company 's ownership, and both are instruments that buyers may use to continue to benefit from the company's potential accomplishments.

Preferred stockholders have a broader right to the assets and profits of a company in a liquidation. This is valid during prosperous days when the company has extra capital and prefers to allocate funds through distributions to customers. For this sort of stock, the dividends are normally greater than those given for common stock. Preferred shares also has preference over common stock, because if a corporation misses a dividend payout, prior to paying out common shareholders, it must first pay any arrears to preferred shareholders.

7. The discount rate is the interest rate that Reserve Banks charge on short-term lending to commercial banks. Discount rate lending by the Federal Reserve complements open market operations in achieving the goal federal funds rate and acts as a liquidity backup source for commercial banks. Lowering the discount rate is expansionary and other interest rates are influenced by the discount rate. Lower rates facilitate consumer and company credit and investment. Similarly, rising the discount rate is contractionary and other interest rates are affected by the discount rate. Higher rates deter consumer and company credit and investment. The Reserve Banks and the Board of Governors are making changes to the discount rate.

Reserve requirements are the portions of deposits that banks, either in their vaults or on loan at a reserve bank, have to keep in currency. There is an expansionary reduction in reserve ratios as it raises the funds available in the financial sector to lend to customers and enterprises. There is a contractionary rise in reserve requirements and it limits the funds available in the financial sector for lending to customers and enterprises. The Board of Governors has exclusive control over changes to the criteria for reserves. Rarely does the Fed adjust reserve criteria.

Open market operations have become a reliable method for the acquisition and disposal of U.S. government securities. This method, as we heard earlier, is operated by the FOMC and enforced by the New York Federal Reserve Bank.