what is the difference between a preferred stock and a common stock?

Answer 1

A preferred stock has a prior claim to assets and in some cases, dividends. It is really a specialized form of debt that takes advantage of the fact that a C-corporation does not have to pay taxes on 90% of the dividends it receives from other corporations, permitting it to "loan" money to another firm but taking a higher claim on the equity than common share holders but a lower one than normal debt. It is an unsecured loan, generally speaking, largely exempt from corporate taxation.

Because of the tax exemption, preferred stocks often pay lower dividends than bonds pay interest, meaning if you personally own one, you are in a less secure position than a bond holder and cannot share in the gains of a common stock holder since the dividend and any ultimate repayment are contractually defined. The exception to this, generally, is convertible preferred stocks which can become common stocks at a price well above the current price, but with a fixed dividend. As an example, if one share of a convertible preferred sells for $20 and the common sells for $20. It may be convertible at $40 per share, meaning you will pay double the current price, but you get a fixed dividend if the board will permit it to be paid, and in the event of bankruptcy you will be paid before the common shareholders.

A common stock is a residual claim to the net assets of a company.

Answer 2

Preferred stock is issued with the agreement of the common stock holders (they vote on it) as a means to raise capital for the company. The main differences are, convertibility into common stock(dilution), normally a fixed interest rate( like a bond) and NO voting rights. If you need more than that, there are good answers and definitions in Yahoo Finance. glossary...try taking a look!

Answer 3

I was going to write a long explanation, but this will probably save both of us some times:

http://en.wikipedia.org/wiki/Preferred_stock