What is the difference between common stock and preferred stock?

The correct choice highlights the key distinction between common and preferred stock, which lies in ownership rights and dividend priorities. Common stock represents ownership in a company and typically comes with voting rights, allowing shareholders to participate in crucial company decisions, such as electing the board of directors. On the other hand, preferred stock usually does not provide shareholders with voting rights.

Preferred stockholders have a higher claim on dividends, which means they receive dividends before common stockholders when the company distributes profits. If a company has financial difficulties or is liquidated, preferred shareholders are also prioritized in recovering their investments before common shareholders. This foundational difference in rights and priorities is essential for investors to understand when determining their investment strategies.

The other options misrepresent the characteristics of each stock type. Common stock does hold voting rights, while preferred usually does not, and common stock does not inherently have priority in dividends but instead shares in the residual profits after all financial obligations are met. The assertion that both stocks are identical in shareholder rights is inaccurate, as each serves distinct purposes and carries different levels of risk and reward for investors.