Which best describes the difference between preferred and common stocks?

• A. Common stockholders are always guaranteed a fixed dividend, while preferred stockholders are not.
• B. Preferred stockholders have voting rights in corporate decisions, while common stockholders do not.
• C. Common stock is typically less risky than preferred stock.
• D. Preferred stockholders generally have priority over common stockholders in receiving dividends.

Answer: (D)

Verified step by step guidance

1. Understand the concept of common stock: Common stock represents ownership in a corporation and typically comes with voting rights, allowing shareholders to participate in corporate decisions. However, dividends for common stockholders are not guaranteed and depend on the company's profitability and discretion.
2. Understand the concept of preferred stock: Preferred stockholders generally do not have voting rights, but they have priority over common stockholders in receiving dividends. Preferred dividends are often fixed and paid before any dividends are distributed to common stockholders.
3. Compare the risk levels: Common stock is generally considered riskier than preferred stock because common stockholders are last in line to receive assets in the event of liquidation, and their dividends are not guaranteed.
4. Clarify the dividend priority: Preferred stockholders are entitled to receive dividends before common stockholders. This priority makes preferred stock more appealing to investors seeking stable income.
5. Summarize the key difference: The main distinction is that preferred stockholders have priority in receiving dividends, while common stockholders have voting rights and potential for higher returns but face greater risk.