Name: Aitezaz Bashir

Roll no: (133)

Section: F2

Assignment no: (03)

Semister: (08)

Field: BBA(HONS) Finance

Department: IBMS Aup Peshawar

Subject: Investment Analysis & Portfolio Management

Submitted to: Dr. Muhammad Nouman

Q: Briefly discuss the similarities and differences between common stock and
preferred stock.
Common Shares:
When someone refers to a share in a company, they are usually referring to common shares.
Those who buy common shares will be essentially purchasing shares of ownership in a company.
A holder of common stocks will receive voting rights, which increases proportionally with the
more shares the holder owns.
Those who purchase common shares try to sell the share at a higher price than when they bought
it in order to turn a profit. Sometimes, common shares will come with dividends that are paid
out.

Preferred Shares:
Although preferred shares still include some features of common shares, they also share some
features with a bond. As a refresher, the bond issuer borrows capital from the bondholder and
makes fixed payments to them at a fixed interest rate for a specific period. Like bonds, preferred
shares receive a fixed amount of income through a recurring dividend.
Additionally, preferred shares come with a par value, which is affected by interest rates. When
the interest rates go up, the value of preferred shares declines. When the rates go down, the value
of preferred shares increases. Similar to common shareholders, those who purchase preferred
shares will still be buying shares of ownership in a company.

Common Stock and Preferred Stock

Common Stock Preferred Stock

Company Ownership Yes Yes
Voting Rights Yes No
Dividend Variable Fixed
Order of Claim to Earnings Second First
Return Based On Earnings Earnings

Common Vs Preferred Shares:

Potential investors who are looking to acquire a stake or ownership in a company can choose to
purchase between common vs preferred shares. Companies typically issue and sell shares to raise
funds for a variety of business initiatives. It is important to know and understand the individual
characteristics and differences between common vs preferred shares before purchasing them.

Differences and Similarity:

1. Company ownership:
Holders of both common stock and preferred stock own a stake in the
company.
2. Voting rights:
Even though both common shareholders and preferred shareholders own a part
of the company, only the common shareholders have voting rights. Preferred shareholders do not
have voting rights. For example, if there were a vote on the new board of directors, common
shareholders would have a say, whereas preferred shareholders would not be able to vote.

3. Dividends:
Although both shareholders can receive dividends, the payment of dividends
differs in nature. For common shares, the dividends are variable and are paid out depending on
how profitable the company is. As an example, Company A can pay out $2 in dividends in
Quarter 1, but if they lose profitability in Quarter 2, they may choose to pay $0.
In contrast, preferred shareholders receive fixed dividends, so Company A would need to
distribute a constant dividend of $2 at fixed intervals. The dividends for preferred shares are also
cumulative, which means if they are missed one period, they will need to be paid back in the
next.
Going back to the example, if Company A misses the $2 dividend for preferred shares in Quarter
2, they will need to pay $4 ($2 x 2) in Quarter 3.

4. Claim to earnings:
When a company reports earnings, there is an order where investors are
paid out. Usually, bondholders are paid out first, and common shareholders are paid out last.
Because preferred shares are a combination of both bonds and common shares, preferred
shareholders are paid out after the bond shareholders but before the common stockholders.
In the event that a company goes bankrupt, the preferred shareholders need to be paid first before
common stockholders get anything.

5. Conversion:
Preferred shares can also be converted to a fixed number of common shares, but
common shares cannot be converted to preferred shares.

6. Returns:
Ultimately, both common and preferred shares are paid out of a company’s earnings.
The returns of a common share are most commonly based on the increase or decrease of the
share price, including an optional dividend paid out. In contrast, the returns on a preferred share
are mainly based on its mandatory dividends.