Common Stock vs. Preferred Stock

The other advantage of preferred stock is that preferred stockholders get priority when it comes to the payment of dividends. In the event of a company's liquidation, preferred stockholders get paid before those who own common stock. In addition, if a company goes bankrupt, preferred stockholders enjoy priority distribution of the company's assets, while holders of common stock don't receive corporate assets unless all preferred stockholders have been compensated (bond investors take priority over both common and preferred stockholders).

Like common stock, preferred stock represents ownership in a company. However, owners of preferred stock do not get voting rights in the business.

The different types of preferred stock include:

• Participating preferred stock, which entitles holders to dividend increases if, during a given year, common stock dividends exceed those of preferred stock dividends.
• Adjustable-rate preferred stock, which is tied to Treasury bill or other rates. The dividend is augmented based on the shifts in interest rates, determined by an established formula.
• Convertible preferred stock, which has a conversion price named at its issuance so that it can be converted to a company's common stock at the set rate.
• Straight or fixed-rate perpetual stocks, which have no maturity date because the dividend rate is set for the life of the issue.

Companies that undergo multiple rounds of financing may issue multiple classes of preferred stock. In these situations, each stock class is granted its own set of rights, per its round of financing (for example, "Group I Preferred," "Group II Preferred," and so on).

Typically, preferred stock is favored by private companies, which often want to separate stockholders' economic interest in the company from the actual governance of the business. Another reason that preferred stock is primarily a tool of private companies is that stock exchanges and governing bodies tend to frown upon companies issuing preferred shares that can be publicly traded.

Issuing stock to shareholders, even in a very small corporation, is a complicated process. Consult this checklist to ensure that you don't miss any critical steps.