I've already suggested, but I didn't really state it clearly,
the difference between common and preferred stock.
We've been talking about common stock.
Now common doesn't mean plain and not pretty,
it means held in common.
The word equity refers to common stock as well. I'll come back to that.
What's the difference?
Preferred stock has a specified dividend which does not grow through time.
And like common stock,
it doesn't have to be paid.
Now again, there might be slight differences in state law.
We have 50 different states in
the United States and other countries have similar institutes,
it's a complicated law.
But, typically the deal is this: the company is
supposed to pay out a fixed dividend to the preferred stockholders,
but it doesn't have to.
But, it cannot pay
a common stock dividend until it's paid up on its preferred stock dividends.
So if they don't pay them,
then they have to- if they haven't paid their preferred dividend
they've got to make it up eventually.
But in contrast, corporate bonds have a contractual obligation to pay a dividend.
So that is, that if the company gets in trouble and it doesn't- as I say dividend,
a coupon, on the bond.
If a company gets in trouble and doesn't pay out
its coupon the shareholders can come back and sue,
force the company into bankruptcy.
Preferred stockholders can't do that otherwise they're kind of like corporate bonds.
During the financial crisis 2000, 2008, 2009,
the U.S. government got
a lot of preferred shares in companies for bailing them out.
The U.S. government didn't want to get common shares,
it wanted to get paid back.
It didn't want to push them into bankruptcy by creating a new form of debt.
So the U.S. government got preferred stock in the company.
Why didn't they get common stock?
Hey, this is America.
The U.S. government, if it were to be buying common stock this would be socialism.
The government would be owning parts of companies and they didn't want to do that.
So they bought preferred stock.
So for example the U.S. government and
the Canadian government I think had a lot of preferred shares in General Motors.
Robert ShillerSterling Professor of Economics at Yale University
