Investors that are looking to purchase shares of ownership in a corporation may have the ability to select either common or preferred shares. Common and preferred stock share some similarities, however preferred shares combine many features of common stock and fixed income.
Common stock is by far the most traded type of equity in the market. The main features of common stock are that shareholders have voting rights on corporate objectives and have the ability to increase the value of their holding through capital appreciation. Shareholders may also receive dividend payments from the corporation. The downside to owning common stock, or ordinary shares, is in the case of bankruptcy. If a corporation were to file for bankruptcy and begin liquidating, owners of common stock receive funds only after debt holders and owners of preferred stock have been compensated. Due to the low level of priority in bankruptcy proceedings, the opportunity for shareholders to receive funds is fairly low.
As stated earlier, preferred stock combines features of both fixed income and common stock. Owners of preferred stock have preference over common shareholders in the case of dividend distribution. In many cases, preferred shareholders receive fixed dividend payments (similar to interest from bonds). In addition to the opportunity for fixed dividend payments, preferred shareholders may also experience capital appreciation in their holding. An added feature for owners of preferred stock occurs in the case of owning shares that are convertible to common stock. Convertible shares allow owners the flexibility to convert their shares of preferred stock for common stock if the opportunity for significant capital appreciation is more appealing than a fixed income stream. Some disadvantages of holding preferred stock are that owners do not have voting rights for corporate objectives and there may be less opportunity for capital appreciation compared to common shareholders.
While most investors prioritize common stock over preferred, owners of preferred stock have the ability to generate a consistent revenue stream with dividend payments as well as the opportunity to convert to common shares if capital appreciation becomes appealing.
Please contact Mitlin Financial in order to discuss advantages and disadvantages of owning preferred stock in your portfolio.
Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.
