Question

Preferred stock is often referred to as hybrid security because it has many characteristics of both common stock and bonds. What are the characteristics similar to common stocks; what are the characteristics similar to bonds? Explain.

Answer 1

Characteristics of preferred stocks which are similar to common shares are as follows-

A. Preferred stock as well as equity shares are traded of the stock exchanges.

B. Preferred stocks are paid dividends just like common shareholders

C. The taxability of the payment of the dividend are also like common shareholders.

D. Preference shares are also permanent shares if they are not redeemed and they will be exhibiting the characteristics of equity.

E. Both are types of unsecured finances.

Similarities between preference share and debt capital are as follows-

A. Both the preference shares and debts capital have fixed Returns

B. Both do not have voting rights

C. Both are generally redeemable

D. Both have superior claim over equity shareholders

E. Both are external finances.