Advantages and Disadvantages of Preferred Stock

Advantages include:
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Its existence increases the firm's financial leverage It is more flexible than debt when it comes to missing an annual payment It is useful for corporate restructuring

Disadvantages include:
o o o

Its senior status to common stockholders jeopardizes common stockholders' returns Its cost is generally greater than that of debt financing It is sometimes difficult to sell since dividends can be passed (unpaid) and returns are generally fixed

Advantages of Preferred Stock

Preferred stock is similar to common stock in that you have an ownership share of the issuing company, although usually without voting privileges. Investors view preferred stock as a hybrid of bonds and common stock because it features fixed dividends and the chance for equity growth. There are advantages for the investor seeking income with lower risk than common stock. Corporations issue several types of preferred stock, each with its own features and advantages.

1. Function
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One of the advantages of preferred stock is lower risk. In the event a company runs into trouble and is forced to liquidate, preferred stockholders are paid first after debts obligations are met. Preferred stock is also less volatile than common stock but still offers the chance of equity growth. Dividends are fixed and must be paid fist before common stock dividends.

Features

Some preferred stocks have additional advantages. If a preferred stock is cumulative, any dividends that are not paid on time accrue and must be paid at a later date. Contingent preferred stock gains voting rights if the company fails to meet its dividend obligations, allowing investors the opportunity to push for changes in company operation or management. Participatory preferred stock can earn added dividends if the company's profits are good.

Purpose

There are advantages of preferred stock for the issuing company. By selling preferred shares the company can improve its balance sheet with equity capital without diluting the voting

power of existing common stock. The company is not legally obligated to pay dividends or to redeem the shares at a maturity date as is the case with bonds.

Preferred stock, as opposed to "common stock," refers to a class of stock that pays dividends at a specified rate and has preference over common shares in the payment of dividends and the liquidation of assets. In addition, preferred stock is generally cumulative, meaning that if the company suspends paying all dividends for a period of time, the preferred shareholders are entitled to their cumulative specified dividends before the common shareholders can participate in any dividends. So in essence, preferred stock is a kind of hybrid security, sharing characteristics of both common stocks and bonds.

These characteristics may be considered advantages over common stock for those investors seeking income by way of dividends, but the downside is that preferred shares don't generally participate to the same degree as common stock if the company performs well and the stock goes up. Further, the market for most preferred stock is very illiquid. In general, if you are investing in the stock market with the intention of making capital gains, you should focus solely on common stock, not preferred stock.

USES OF BOND FINANCING

As noted above, the state often uses bonds to finance its major capital outlay projects such as educational facilities, prisons, parks, water projects, and office buildings. This is done mainly because these facilities provide services over many years, their large dollar costs can be difficult to pay for all at once, and different generations of taxpayers benefit from the facilities. The latter fact offers a rationale for spreading the costs of infrastructure over time, as bond repayments allow you to do. In contrast, funds to operate facilities or deliver services to the public are paid out of current revenues.

What Are the Advantages & Disadvantages of Selling Stock to Raise Funds for a Small Business?
By Nicholas Malino, eHow Contributor

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Selling stock can be an efficient means of raising capital under certain conditions. Many companies get their start with capital contributed by friends, family, and people close to the company who may provide capital in exchange for ownership in the company in the form of stock. As a business matures and begins operations, some of its capital requirements may still be met by additional sales of stock. There are several important advantages and disadvantages of using stock sales as a source of capital. Related Searches:

Raising Funds Stock Investing

1. Advantages
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Selling stock has the advantage of raising capital without incurring a corresponding debt that will have to be repaid. The investor is receiving ownership interest in the company as consideration for the investment. The purchasing shareholders are counting on the value of their ownership increasing so that when the investors need their money back, the shares can be sold at higher price..

Variable
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In order for a company to sell its stock, the stock must first be registered with the U.S. Securities and Exchange Commission. However, if the company qualifies for one or more of the exemptions from registration offered by the SEC, its shares can become available for sale in a few days to a few weeks with very little cost. The exemptions have been engineered for small businesses, which, according to the 2006 Final Report to the SEC by the Advisory Committee on Smaller Public Companies, make up nearly 80 percent of American businesses.

Disadvantages
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In the absence of one of these exemptions, the registration process requires the company to submit extensive paperwork and disclosures which are reviewed and then commented on by the SEC. This process can take six months or more and requires the company to engage auditors, accountants and lawyers, making the process not only time-consuming but also prohibitively expensive for raising small amounts of capital.

Dilution
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Another disadvantage is the potential for dilution of the existing shares. Whenever additional shares are issued, the percentage of the prior shareholders' ownership is diminished. This is referred to as dilution. If additional shares are issued and the overall value of the company remains the same, then the value of the stock owned by the original shareholders lessens. Needless to say, this is not in the best interest of the shareholders.

Bottom Line
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Selling the company's common stock to raise capital can be an effective method of capital formation if the company qualifies for one of the three exemptions from registration offered by the SEC, and if the increase in the overall value of the company resulting from the application of that capital exceeds the loss in value to the original shareholders resulting from the dilution.

Read more: What Are the Advantages & Disadvantages of Selling Stock to Raise Funds for a Small Business? | eHow.com http://www.ehow.com/about_7417645_advantages-raise-fundssmall-business_.html#ixzz1fluXZh8M

Common Stock vs. Preferred Stock

Common stock and preferred stock are the two main types of stocks that are sold by companies and traded among investors on the open market. Each type gives stockholders a partial ownership in the company represented by the stock. Despite some similarities, common stock and preferred stock have some significant differences, including the risk involved with ownership. Its important to understand the strengths and weaknesses of both types of stocks before purchasing them. Common Stock Common stock is the most common type of stock that is issued by companies. It entitles shareholders to share in the companys profits through dividends and/or capital appreciation. Common stockholders are usually given voting rights, with the number of votes directly related to the number of shares owned. Of course, the companys board of directors can decide whether or not to pay dividends, as well as how much is paid.

Owners of common stock have preemptive rights to maintain the same proportion of ownership in the company over time. If the company circulates another offering of stock, shareholders can purchase as much stock as it takes to keep their ownership comparable. Common stock has the potential for profits through capital gains. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Shareholders are not assured of receiving dividend payments. Investors should consider their tolerance for investment risk before investing in common stock. Preferred Stock Preferred stock is generally considered less volatile than common stock but typically has less potential for profit. Preferred stockholders generally do not have voting rights, as common stockholders do, but they have a greater claim to the companys assets. Preferred stock may also be callable, which means that the company can purchase shares back from the shareholders at any time for any reason, although usually at a favorable price. Preferred stock shareholders receive their dividends before common stockholders receive theirs, and these payments tend to be higher. Shareholders of preferred stock receive fixed, regular dividend payments for a specified period of time, unlike the variable dividend payments sometimes offered to common stockholders. Of course, its important to remember that fixed dividends depend on the companys ability to pay as promised. In the event that a company declares bankruptcy, preferred stockholders are paid before common stockholders. Unlike preferred stock, though, common stock has the potential to return higher yields over time through capital growth. Remember that investments seeking to achieve higher rates of return also involve a higher degree of risk. *** Both common stock and preferred stock have their advantages. When considering which type may be suitable for you, it is important to assess your financial situation, time frame, and investment goals