Reasons to Consider Using Preferred StockĬompanies typically issue preferred stock for one or more of the following reasons: Trust Preferred Stock: A form of preferred stock that can act as debt from a tax perspective, but is seen as common stock on the balance sheet Preference: If the company has multiple issues of preferred stock, the preferred stock may be ranked by priority with the highest being prior, followed by first preference, second preference, etc.

This provides protection against changes in inflation or interest rates. This provides additional protection to preferred shareholders.Īdjustable Rate: The dividend rate may vary based on external factors. Special voting rights may apply when dividends are suspended or the company is in financial distress.

Voting: Most preferred shareholders have no voting rights under normal circumstances. This may happen at the option of the company, the shareholder or based on certain financial conditions. This is in addition to preferred dividends.Ĭonvertible: Convertible preferred shares may be exchanged for common shares. Participating: A participating feature gives preferred shareholders the right to receive a share of dividends paid to common shareholders.

If preferred stock is designated as cumulative, the suspended dividends accumulate, and you must later pay them in full. You have sole discretion whether to exercise the option.Ĭumulative: You may retain the right to suspend payment of dividends. These are set out in the initial preferred stock agreement.Ĭallable: A call option gives you the right to repurchase preferred shares at a fixed price or par value after a set date. Preferred stock may carry optional features that benefit either the company or shareholders. The call option allows you to reduce your outstanding equity and offer a greater portion of your company. You can also remain flexible for future financing rounds by keeping debt off of your balance sheet and retaining a call option. You generally maintain greater control over your company than if you issue new common shares. Preferred stock gives you a financing alternative to taking on debt. Preferred stock also receives special rights, including guaranteed dividends that must be paid out before dividends to common shareholders, priority in the event of a liquidation, is listed separately from common stock, and trades at a different price than common stock. As with common stock, shareholders receive a share of ownership in the company. Preferred stock is a special class of equity that adds debt features.

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