Question

Question 3: Briefly discuss the difference between a share of common stock versus a share of preferred sock. What are the characteristics of each? What is meant by a call provision?

Answer 1

The important points of difference between the common and preferred stock and their characteristics are as follows:

1. The common stock has to be paid at last in case of bankruptcy while the preference shares are paid prior to the common stock.

2. The growth potential of shares is unlimited while for preference shares it is limited to redemption value.

3,Common stock carry voting rights while preferred have no voting rights.

4. The common stock doesn't have any fixed dividend payouts but preferred stock does have.

The call provision means a right to the issuer to call for the redemtion of the bonds before the end of tenure. This is done by the issuer to protect itself against the fall in interest rates in the market. The yield on the callable security is higher than the market.