Question

Given the current economic environment and s impact on the capital markets which security do you think has the lowest risk common stocks prefermed stocks pr bonds? why? explain your answer based on the difference between theses securities

Answer 1

The order of preference in payment of return as well as principal, in the event of winding up is:

1] creditors [debt suppliers, bond holders],

2] preferred stockholders and

3] common stockholders.

Thus, common stock holders have the last priority and hence bear the brunt of losses in the event of abnkruptcy. The next to suffer, in terms of gravity of losses, are the preference stockholders. Those who suffer the least are the bondholders, who get paid up first [both interest and principal]. Thus, order of risk [highest to lowest] is;

common stockholders,

preference stockholders, and

bond holders.

The above order of risk is the same, whether there are adverse economic conditions or not. But, the risks increase for all the stakeholders.

So, in the case of adverse economic conditions the bondholders have the lowest risk.