Advantages and Disadvantages of Issuing Preferred Stock vs. Bonds
Stock is a share of ownership in a company, sold by the company to its investors. “A bond is a form of an interest-bearing note…..requires periodic interest payments with the face amount to be repaid at the maturity date.” Both stock and bonds come in different classes: common and preferred stock, convertible, term, serial, callable and debenture bonds. Preferred stock, as defined by the Financial Accounting textbook, is “one or more classes of stock with various preference rights such as a preference to dividends.” Dividends are “distributions of a corporation’s earnings to stockholders.” These dividend rights are shown as a dollar amount per share or a percentage of par (Warren/Reeve/Duchac, 2012).
There are several advantages and disadvantages to issuing preferred stock. A couple of the advantages to preferred stock are fixed rate of dividends and no voting rights. Fixed rate of dividends means that whatever the stock is issued at percentage of par when the stock is inquired by the investor is what the dividends will remain when paid by the company. Plus, they make the investor feel more secure in their decision to buy into the company with the knowledge that preferred stockholders are paid first, the amount contracted, and even in terms of liquidation. When speaking of voting rights, stockholders do not have a say in anything the company does and does not do. The company retains its ownership with preferred stock. However, those who invest with common stock have a right to vote in the direction they believe the company should go. (Raghavendra, 2013)
As with everything, preferred stock has its disadvantages. Some of the downsides include company appearance and taxation. The appearance and reputation of the company rests a good deal on the prices of preferred stock. As long as the prices remain good within the market the company stays in good graces but when there is a significant drop in...