Chapter 8.3, Problem 4R

To determine

To evaluate: The preference to invest to buy preferred stock or common stock.

Explanation of Solution

Potential investors looking to buy a stake or equity in a company may opt to choose between common and preferred shares. Usually businesses issue and sell shares to collect funds for a variety of company initiatives. Knowing and recognizing the individual characteristics and differences between common and preferred shares is critical before buying them.

Many people who purchase stock choose common stock over preferred stock, as common stock investors have voting rights and their dividends rise as the value of the stock of the business increases.

Popular shares exist even more than preferred shares. Whether or not to buy common shares or preferred shares largely depends on the expectations of the buyer. Those who buy common shares are generally interested in higher benefit opportunities but with higher risk. So, that they want to spend $1,000 in common stock.

Economics Concept Introduction

Introduction: Common stock representing ownership security within a company. Common stock investors elect executive committees and vote on corporate policies. Common stock is listed in the equity portion of the balance sheet of a company.

Preferred stock is a kind of stock that posses the characteristics like equity and debt instrument properties, and is commonly called a hybrid system.