Question

Assume yourself to be a 60 year old investor who is willing to invest in stock market. You can either invest in common or preferred stock of various companies listed in stock exchange. Based on characteristics of both stocks, which stock would you choose and why?

Answer 1

A common stock has the following characteristics-

• Voting rights in decisions of the company
• No fixed dividend. Has unlimited upside and downside risk.
• Capital invested may not he recovered
• Last claim in case of bankruptcy
• Usually does not have a tenure and is issued for a lifetime

A preferred stock has the following characteristics-

• No voting rights
• Has a fixed dividend if the company makes profits
• Capital invested will mostly be recovered
• It has a claim higher than common stock in case of bankruptcy
• Usually issued for a fixed period of time, say 30 years

As my age is 60 years, I will be looking at a stable income with lower amount of risk. Comparing the two types of shares, preferred shares have a lower risk and more stable income. Hence,you should choose preferred shares over common stock.

Do let me know in the comment section in case of any doubt.