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Preferred Stock: Understanding Investment Performance

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  • 0:02 Stock
  • 1:16 Preferred Stock
  • 1:42 Dividends
  • 2:15 Earnings
  • 3:05 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

After watching this video lesson, you will understand the differences between preferred stocks and regular stocks. You'll also learn how to calculate your dividends and earnings on your stocks when you sell them.

Stock

Many large companies are owned by the public. These companies sell stocks, or shares of ownership to the public, to people like you and me. Anybody can be a part owner of a large business, like the soda companies, by just buying one stock. How much do these stocks cost? It depends on how well the company is doing. One stock from a large company that is doing well may cost you $120 per stock, while another stock from a smaller company may only cost $1.

Each stock represents a percentage ownership in the company. What that percentage is depends on how many stocks the company has available. For example, if you bought 1 stock from a company with a total of 500 stocks, you would have a 1/500 or 0.002 or 0.2 percentage ownership in the company. The more stocks you own or purchase, the more of the company you own.

People will buy and sell stocks to make money. For example, if you bought some stock for $4 each from a company and then later sold it for $10 per stock when the company was doing better, you would have gained $6 per stock from selling your stocks in that company. If you purchased regular stocks, you would also have voting rights based on your percentage ownership.

Preferred Stock

Some companies, though, also offer what is called preferred stock. These are shares of ownership with no voting rights. If you purchase these kinds of stocks, you would have a percentage ownership in the company but you wouldn't have any say in what the company does. You don't get to vote. What you do get is you get to benefit from the profits of the company. When the company makes a lot of money, then you are the first in line to receive those benefits.

Dividends

These benefits are given in the form of dividends, earnings shared with stockholders. Companies will tell you how much your dividend is per stock. For example, a soda company might say that their dividends are $1 per stock. If you owned 20 stocks in this soda company, then you would get 1*20 or $20 when dividends are distributed to the stockholders. If you owned preferred stock, then you would be first in line to receive these dividends. Companies pay out dividends first to the preferred stock holders and then to the regular stock holders.

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