Write a 250- to 350-word paper explaining why preferred stock is referred to as preferred and what some of the features added to preferred stock are that make it more attractive to investors. Would you select preferred stock or common stock as an investment? Why? Solution Preferred shares are the shares which have priority over the common shareholders. Preferred stock promises a series of fixed payments to the investor and with relatively rare exceptions preferred dividends are paid in full and on time. Nevertheless, preferred stock is legally an equity security. This is because payment of a preferred dividend is within the discretion of the directors. The only obligation is that no dividends can be paid on the common stock until the preferred dividend has been paid. If the company goes out of business, the preferred stockholders get in the queue after the debtholders but before the common stockholders. Preferred stock rarely confers full voting privileges. This is an advantage to firms that want to raise new money without sharing control of the firm with the new share-holders. However, if there is any matter that affects their place in the queue, preferred stockholders usually get to vote on it. Most issues also provide the holder with some voting power if the preferred dividend is skipped. Most preferred stocks have the following distinctive features: Preference over common stock as to dividends. Cumulative dividend rights. Preference over common stock as to assets in event of the liquidation of the company. Callable at the option of the corporation. No voting power. Another important but less common feature of some preferred stocks is a clause permitting the conversion of preferred stock into common stock at the option of the holder. Preferred stocks vary widely with respect to the special rights and privileges granted. Preferred stocks generally offer investors more assurance of regular dividend payments than do common stocks. If I want to invest safely and do not want to bear any risk then I would prefer investing in preferred stock rather than common stock, whereas if I am willing to take risk so as to attain higher profits on the investment I would invest in common stock. .

1. Write a 250- to 350-word paper explaining why preferred stock is referred to as preferred and
what some of the features added to preferred stock are that make it more attractive to investors.
Would you select preferred stock or common stock as an investment? Why?
Solution
Preferred shares are the shares which have priority over the common shareholders. Preferred
stock promises a series of fixed payments to the investor and with relatively rare exceptions
preferred dividends are paid in full and on time. Nevertheless, preferred stock is legally an equity
security. This is because payment of a preferred dividend is within the discretion of the directors.
The only obligation is that no dividends can be paid on the common stock until the preferred
dividend has been paid. If the company goes out of business, the preferred stockholders get in the
queue after the debtholders but before the common stockholders.
Preferred stock rarely confers full voting privileges. This is an advantage to firms that want to
raise new money without sharing control of the firm with the new share-holders. However, if
there is any matter that affects their place in the queue, preferred stockholders usually get to vote
on it. Most issues also provide the holder with some voting power if the preferred dividend is
skipped.
Most preferred stocks have the following distinctive features:
Preference over common stock as to dividends.
Cumulative dividend rights.
Preference over common stock as to assets in event of the liquidation of the company.
Callable at the option of the corporation.
No voting power.
Another important but less common feature of some preferred stocks is a clause permitting the
conversion of preferred stock into common stock at the option of the holder. Preferred stocks
vary widely with respect to the special rights and privileges granted.

2. Preferred stocks generally offer investors more assurance of regular dividend payments than do
common stocks.
If I want to invest safely and do not want to bear any risk then I would prefer investing in
preferred stock rather than common stock, whereas if I am willing to take risk so as to attain
higher profits on the investment I would invest in common stock.