Prudential Financial

Equities: Common and Preferred Stock

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Common Stock
People who own shares of common stock expect one or both of two things in return - dividends and/or capital appreciation. Dividends are taxable payments given to shareholders from the company's current or retained earnings. The continuation of the dividend payments depends on the company's ability to maintain or grow its current or retained earnings. Therefore, there is no assurance that dividends will continue to be paid. Dividends are generally paid quarterly and are usually distributed in cash, although stock or other property can also be given as dividends. Capital appreciation is the difference between the price you paid for a stock and its current value.

Owning shares of common stock entitles you to vote in the election of the corporation's directors and other issues. Each share that you own represents one vote.

Preferred Stock
Preferred stock offers investors certain advantages over common stock. Preferred stock represents ownership units in a company, but, unlike common stock, most preferred stock does not carry voting rights. However, preferred shareholders have priority over owners of common shares regarding payment of dividends. This means that they get paid their dividends, even if the common stockholders get none. Also, if the company goes bankrupt, preferred stockholders have priority over common stockholders in the distribution of corporate assets. Bond investors, though, have priority over preferred stockholders.

The market price of most preferred stock is not as volatile as common stock, which means prices of preferred stocks do not move up or down as quickly as common stock prices. Like bonds, preferred stock prices are interest-rate sensitive - when interest rates go up, the price of preferred stocks generally goes down; when interest rates go down, the price of the preferred stocks generally goes up.

There are a number of types of preferred stock, including:

  • Straight or fixed rate perpetual: The dividend rate is fixed for the life of the issue, and it has no maturity date.

  • Convertible preferred stock: A preferred stock that can be converted to the company's common stock at a conversion price that is determined at issuance.

  • Adjustable rate preferred stock: It generally pays a quarterly dividend that is tied to a Treasury bill or other rate. The dividend is adjusted to changing interest rates according to a predetermined formula.

  • Participating preferred stock: Holders of this type of preferred stock receive dividend increases in years during which common stock dividends are greater than those of the preferred stock.