How Do You Choose To Issue Preferred Stock Or Common Stock?
Both preferred and common stock are ways in which companies raise capital from prospective investors. From the investor point of view, preferred and common stock provide two different risk/return profiles. From the issuing company’s perspective, preferred stock acts a lot like equity—the principal is not guaranteed and the interest payments are treated as dividends. Preferred stock holders are also paid before common stockholders. The challenge for the issuing company is determining which capital-raising instrument is best for it. Choose preferred stock if you want to issue stock without the right to vote. Preferred stockholders give up this right, since they are paid prior to common stockholders. Choose preferred stock for a higher earnings per share. Preferred stock does not require the issuance of additional shares of stock. Therefore, it does not have the same dilutive effect that raising additional capital through a common stock issuance would have. Choose preferred stock if you
