Corporate Bonds, Common stock, and Preferred Stock Higher return means higher risk. People use excess money to invest in a corporation. It is a good way gain more money than put money into the saving account to get a little interest. Before you invest you should analyze the characteristics of corporate bonds, common stock, and preferred stock; and also be aware of their advantages and disadvantages. The corporate bonds are issued by corporations. They are used to increase capital for issuing companies. They are usually riskier than treasuries.
However, one must always think over who has issued the specific bond and what its rating is. In addition, the interest on corporate bonds is subject to federal, state, and local taxes. Corporate bonds characteristics depend on the specific issuing organizations or institution. For example, secured bonds are asset –backed bonds; they are issued using specific properties or assets as collateral. When the famous company has a default in its firm, the secured bond becomes an unsecured bond (unsecured bond are also known as debenture bonds).
They are backed only by the general credit worthless of the issuer. Such as the bonds issued by Freddie Mac or Fannie Mae. “A mortgage bond where the bond is back by a pool of mortgages. ” (Hashemian) On the other hand, the company bond is not guaranteed to make profit. It depends on the company’s performance. The other characteristic is the face value or par value. It is the amount of money a bond holder will bet back once a bond matures. Normally, corporate bonds have a par value of $1000. The bondholder receives a coupon. This is the amount of the interest payment.
The bondholder can receive interest payment monthly, quarterly or annually depending on the company. Corporate bond is a fixed rate bond or a floating- rate bond (an adjustable interest payment). It usually offers a higher yield in order to entice investors. (Investopedia) “Common stock is the basic form of ownership of a corporation. ” All corporations issue common stock with a specific number of shares authorized for issuance by the board of director. Each share describes an equal percentage of the ownership of the corporation. The people who own common stock (shareholders) have many benefits. First they have voting rights. Such as vote on issues affecting the corporation, election of broad of directors, approval of mergers with other corporations, corporate takeovers, or changes to corporate by law. • Second, if the shareholders are authorized by the corporation’s board of director, they have a right to received dividends. Their dividends are normally paid in cash on quarterly basis, or be paid in additional shares of stock. • Third, common shareholders have the right to receive financial consideration for the shares they own if a corporate merger is approved by shareholders.
Typically they will get cash payment for their shares, or in the case of an acquisition of the corporation by another company they might receive shares in acquiring company in switch for the shares they currently own. (King) • Forth, the shareholders have the right to receive a proportionate distribution of assets on corporate liquidation if the board and shareholders approve a dissolution. (Wfu) Common stock has many of advantages to attract investors. They are listed below: 1. Annual returns on investment of over 100% have occurred on a some what regular basis. . It is very liquid if the owner wants to sell or buy in fair price. 3. There are two ways to get benefit for the common stockholder, one is capital gain, and the other is dividends. 4. Stocks have historically offered very high returns in relation to other investments, even thought past performance is not a guarantee of future performance. 5. It has limited legal liability. Passive stockholders are protected against any liability stem from the company’s actions farther their financial investment in the company.
There are many of disadvantages from common stock that the investor should be thinking over: • Because common stock has an ownership of a business, stockholder is the last to get paid as other owners. [It is also the riskiest investment. ] • Although shareholders are company owners, they can not normally walk in and demand to review in detail the company’s books [like a sole-entrepreneur]. • Limited information from the company might affect investor’s decision. • Investors sell their stock often due to volatile stock prices, especial it declines in prices. Stock values change for no obvious reason that makes the investors be quite frustrating for investment. (Finweb) The characteristics of preferred stock: they are company shares that sold by companies who are looking to increase capital for business operations and expansions but do not want the hassle of increasing the number of common shares. The owners of the preferred stocks also have ownership in the company that issues the stock, but they do not have voting rights. Instead, the shareholder gets a fixed income that is paid out in the form of dividends.
This dividend is paid before common stock holders’. If the company is bankrupt, the preferred stockholders are paid after the creditors but before the common stockholders. The other characteristic of preferred stock is the company issuing the stock guarantees dividend payments as long it is financially. If due to business downswing, the company is not able to pay the dividend, it will pay it retroactively. Preferred stock is considered of corporate bond and common stock. It does not only pay dividends to the investor, it also grows in value. Smartstockmarket) The advantages of preferred stock: • Preferred shareholders guarantee to get paid dividends as long as the company is fiscally able to do so. They always get paid before the common stockholders. • Its existence increases the companies financial leverage • It is more flexible than debt when it comes to missing an yearly payment • It is useful for corporate reorganization (Uni) The disadvantages of preferred stock include: • Its senior status to common stockholders is hazardous to common stockholders’ returns.
Adding preferred stock to the firm’s capital structure creates added claims prior to those of common stockholders. The common stockholders’ dividends might be reduced. (Thefutureofmoney)Or might get nothing if the company is in poor performance. • Its cost is generally higher than the cost of debt financing due to the payment of dividends to preferred stockholders is not guaranteed. Since preferred shareholders are willing to accept the extra risk of buying preferred stock rather than long-term debt, they must be compensated with a higher return.
Another factor causing the cost is that preferred dividends must pay taxes. (Thefutureofmoney) • It is sometimes difficult to sell since dividends can be passed (unpaid) and returns are in general fixed (Uni) More risk, more return, unlike corporate bond, preferred stock and common stock are the highest investment. Before you invest, you should think over their good feature, and their bad feature. Works Cited Finweb. “Common Stock – Advantages and Disadvantages. ” Finweb. com. 12 March 2010.