Differentiate between common stock and preferred stock.

• A. Common stock typically has voting rights and potential for higher capital gains and dividends; preferred stock has fixed dividends and higher claim on assets but usually lacks voting rights.
• B. Common stock has fixed dividends and higher claim on assets but usually lacks voting rights.
• C. Both are the same in terms of dividends and voting rights.
• D. Preferred stock has voting rights and variable dividends.

Answer: (A)

Common stock and preferred stock differ in voting rights, how dividends work, and priority in assets. Common stock usually carries voting rights at shareholder meetings, and it offers the potential for higher capital gains and dividend growth if the company does well. However, dividends from common stock are not guaranteed and can be reduced or skipped during tough times. Preferred stock, on the other hand, generally pays a fixed dividend, providing more predictable income, and it has a higher claim on a company’s assets in liquidation. But it typically does not come with voting rights, or has very limited ones, so you usually don’t get a say in corporate decisions. This combination makes common stock geared more toward growth and influence, while preferred stock leans toward steady income and safety in liquidation. So the correct idea is that common stock has voting rights and potential for higher gains, while preferred stock has fixed dividends and a higher claim on assets but usually lacks voting rights.