Question

The pros and cons of preferred stock.

This 1-2 page paper should show solid research.

Answer 1

A company has several ways of raising money from the public in order to carry out its operations. One of the common ways of raising money is by issuing stocks in the market. There are two types of stocks predominantly. They are Equity stocks or Common stocks and Preferred stock. These two are distinct from each other. Preferred stock have some advantages over the common stock and also some disadvantages over common stock.

Pros of Preferred stock:

These stocks have less risk and the stockholders are more assured about the payment of dividends to them. They are paid the dividends first then the common stockholders are paid. Even in case of liquidation of the business, the preferred stockholders are paid first. It gives the benefits similar to a bond as well as an equity share. It also gives a higher rate of return when compared to common equity. Tax exemption can be availed on the income from Preferred stock.

Cons of Preferred stock:

The Preferred stockholders do not get any voting rights i.e. they are not able to take part in the decisions taken by the company. There is no growth in the dividend rate, it is fixed irrespective of the financial condition of the firm. It is also linked with the interest rates prevailing in the market.