Question

What are the advantages and/or disadvantages of owning preferred stock instead of its common stock of another company. If a parent company already owns a controlling interest in a company's common stock, why would it invest in any preferred stock of the subsidiary?

Answer 1

MEANING :Preferred stock also known as preference share are share were dividends paid out to share holders before dividend paid out to common stock

ADVANTAGES:1)Preferred stock normally have a preference over a common share holder with respect to divdend

2) preferred shareholder also have a greater claim to compny assets in liquidation

3) Even company missed pay dividend ,it will paid first for any arrears to preferred shareholder.

4)preferred shareholder usually have a guarantee of fixed dividend as compared common stock which has a variable dividend

Disadvantages :A main difference is preferred share don't come with voting rights, so when it come to appoint a director or to vote on important policy preferred shareholder have No Voice.

2) callable preferernce share can be call or redeem by issue at par

3)The dividend on most type are fixed similar to other type of fixed securities such as bond .fixed divdend also make preference share sensitive to interest rate change.when interest rate rise ,price of fixed security fall.

If a parent company already owns a controlling interest in a company's common stock, why would it invest in any preferred stock of the subsidiary?

Even though company have a controling interest they invest in preferred stock because preferred stock is fixed income securities & if the perform well the value of preferred securities can appreciate independendly of interest rate movement.

preferred also provide an option call cumulative shares,which is surety that company return in profit it will clear all oustanding.

preferred stock is an excellent way when want low risk investment

A covertible preferred share also provide avenue to get a fixed number of common stock in future