Why Issue Common Stock Vs. Preferred Stock

The issuance of common stock is one of the most typical ways for a company to raise capital. The reasons why a corporation or business issues common stock instead of preferred stock are complicated, but common stock is generally preferred by investors. The advantages of common stock shares are many, and their sale and trading account for a large part of the way business is done in the modern free market economy today.

Voting Rights

You are buying a part of the ownership of the company when you purchase its common stock shares; partial ownership gives an investor a say in the running of the company. Common shareholders are given a vote, proportional to the amount of the company they own, which can be exercised when a board of directors is chosen and other crucial decisions are made. Preferred shareholders generally do not have voting rights.

Dividends

Common stocks have no fixed dividend and so the earnings that can be gained through the ownership is unlimited. Preferred stocks have a fixed dividend rate that is generally paid regardless of a company's earnings in any year. This makes owning common stock a more risky proposition, but also one in which there is considerably more to be gained. On average, common shares perform better than either preferred stocks or bonds over time.

Trading

A company issues common stock versus preferred stock in order to raise its value through the stock market. By issuing common stock a company opens itself up to the intelligence of the market. The valuation of a company will have the potential to either rise or fall considerably in a short amount of time, depending on trading price. Preferred stocks are not always tradable, and are not generally used when valuing a company.

Going Public

A company goes public by issuing common stock to be traded on a stock exchange. This is a part of the maturity process of a company and marks its full establishment as a major business. The issuing of preferred stock, on the other hand, is often associated with the pre-public stage of a company, and is done merely for raising capital. By going public, a company is significantly expanding its organizational reach and potential.

References

• CNN Money.com: Preferred Shares; August 18, 2004
• CNN Money.com: Stocks Meredith Whitney Loves; Jon Birger; October 8, 2008
• CNN Money.com: High-Yield Stocks For Retirement; Michael Sivy; December 10, 2007
• "USA Today"; Preferred Stock Can Give You Income and Appreciation; Matt Krantz; May, 2008
• "USA Today"; Ford Preferred Stock; Matt Krantz; May, 2010

Resources

• "The Wall Street Journal"
• "Business Week"
• Yahoo! Finance