Common versus Preferred Stock

Michael is evaluating two different types of stocks for his investment portfolio: common stock and preferred stock. He wants to invest in a security that provides regular income while still offering some potential for appreciation.

Which of the following statements best describes the key differences between common and preferred stock?

Common stockholders receive fixed dividends, while preferred stockholders receive dividends that fluctuate with company earnings.
Preferred stock typically has priority over common stock in dividend payments and liquidation, but it usually does not have voting rights.
Common stockholders have priority over preferred stockholders in receiving dividends and liquidation proceeds.
Preferred stock generally has higher long-term growth potential than common stock but carries greater voting rights.

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Answer: B

Preferred stockholders receive fixed dividends and have priority over common stockholders in the event of a liquidation, but they typically do not have voting rights.

Common stockholders, on the other hand, have voting rights and greater potential for long-term growth but face more risk because dividends are not guaranteed.

Statement A is incorrect because common stock dividends are not fixed, whereas preferred stock dividends generally are.

Statement C is incorrect because preferred stockholders receive dividends first, not common stockholders.

Statement D is incorrect because common stock has higher long-term growth potential, not preferred stock.

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