Learn The Stock Market And How to Trade

Recently the US government converted its preferred shares which it acquired as part of the TARP fund (which was to pay a 5% dividend for the first 5 years and 9% dividend after the initial 5 years) to common stock.  If Citigroup held the shares for 10 years it would have paid out 17.5 billion in dividend payments.  However, before the first dividend payment they paid $3.25 per share for a common stock conversion.  This share dilution dropped the value of common stock below $1 before setting just over $1 by the end of this week (03-06-09).  C stock will have to rise by 18.64% per year for 10 years to break even with the preferred stock deal.  My hunch is this wasn’t a good investment for the share holders or the US citizens (tax payers.)

So you might be asking just what is the difference between preferred stock and common stock?

Common Stock

Common stock is the baseline proof of ownership in a  corporation.  When you are a common stock shareholder you have a right to vote, assets in a liquidation, and dividend payments as approved by the shareholders.  You also have the right (preemptive rights) to purchase new shares that are being released before the public in order to maintain your percent ownership.

Preferred Stock

Preferred stock is another form of ownership in the company.  The payout terms are prearranged – fixed dividend schedule etc.  Another perk is that you get paid before common stock holders in both dividend and asset liquidation.  This includes previously missed dividend payments.  You must be caught up in your agreed payments before the the common stock holders get any dividend payments.  The disadvantage is no voting right and virtually no capital appreciation over the long run.

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