Shelby Johnson Week 5 Accounting IIDecember 13, 2013Common StockThe holders of common stock can reap two main benefits: capital appreciation and dividends. Capital appreciation occurs when a stock's value increases over the amount initially paid for it. The stockholder makes a profit by selling the stock at its current market value after capital appreciation.
Dividends, which are taxable payments, are paid to a company's shareholders from retained or current earnings. Typically, dividends are paid to stockholders on a quarterly basis. Payments are usually made in the form of cash, but other property or stock can also be used. Payment of dividends, however, hinges on a company's capacity to grow -- or maintain -- current or retained earnings. This means ongoing payment of dividends cannot be guaranteed.
Common stock has the additional benefit of enabling its holders to vote on company issues and when choosing the company's leadership. Usually, one share of common stock equals one vote.
Preferred Stock Preferred stock doesn't offer the same profit potential as common stock, but it’s a more stable investment vehicle because it guarantees a regular dividend that isn't directly tied to the market as with the price of common stock. Preferred stock guarantees dividends, which common stock does not. The price of preferred stock is tied to interest rate levels; it tends to decrease if interest rates go up and increase if interest rates fall.
Preferred stockholders get priority when it comes to the payment of dividends. If a company is liquidated, preferred stockholders get paid before those who own common stock. In addition, if a company goes bankrupt, preferred stockholders enjoy priority distribution of the company's assets; holders of common stock don't receive any corporate assets until preferred stockholders have been compensated.
Like common stock, preferred