Question

Describe the basic rights of common stockholders. What are the key differences between common and preferred stock?

Answer 1

Answer:

Common stockholders are otherwise known as ordinary shareholders. They have voting rights to appoint and remove directors. The also have the voting rights to appoint and remove auditors.

Common stockholders are legal owners of a company while preferred shareholders are not.

Common stockholders are entitled to residual earnings of a company while preferred stockholders receive their dividends before dividends on common stocks are paid.

Common stock holders bear the greatest risk in the event of liquidation of a firm than preferred stockholders

                                                                               

Explanation:

Common stock is not a fixed income security. As such, their dividends are not fixed. Common stock is a form of ownership of a firm, thus, common stockholders bear the highest risk in a firm. Common stock dividends may not be paid.

Preferred stock is a fixed income security. Therefore, preferred stockholders receive fixed dividends from time to time. Preferred stockholders' fixed claims are settled before the payment of dividend on common stock. In the event of liquidation. preferred stockholders have preference over common stockholders in the distribution of a company's assets.