There are several ways companies can raise funds, including stocks and bonds. Corporations can also choose which kinds of stock they offer to the public. They base that decision on the type of relationship they want with 澳洲幸运5官方开奖结果体彩网:shareholders, the cost of the issue, and the need prompting the financꦬing.ജ

When it comes to raising capital, some companies elect to issue 澳洲幸运5官方开奖结果体彩网:preferred stock in addition to 澳洲幸运5官方开奖结果体彩网:common stock. How𒁃ever, the reasons for this strategy vary among corporations.

Preferred Share Basics

澳洲幸运5官方开奖结果体彩网:Preference shares act as a hybrid between common stocks and bond issues. As with any produced good or service, corporations issue preferred shares because consumers—investors, in this case—want them. Investors value preference shares for their relative stability and preferred status over common shares for dividends and 澳洲幸运5官方开奖结果体彩网:bankruptcy liquidation. Corporations mostly value them as a way to obtain 澳洲幸运5官方开奖结果体彩网:equity financing without diluting voting rights and for their 澳洲幸运5官方开奖结果体彩网:callability. Preferred stocks are also occasionally 🍌useful to fir🙈ms trying to fend off hostile takeovers.

In most cases, preference shares comprise a small percentage of a corporation's total equity issues. There are two reasons for this. The first is that preferred shares are confusing to many investors (and some companies), which limits demand. The second is that common stocks and bonds are generally sufficient options for financing.

Why Investors Demand Preference Shares

Most shareholders are attracted to preferred stocks because they offer more consistent dividends than common shares and higher payments than bonds. However, these dividend payments can be deferred by the company if it falls into a period of tight 澳洲幸运5官方开奖结果体彩网:cash flow or other financial hardship. This feature of preferred stock offers maximum flexibility to the company without the fear of missing a debt payment. With bond issues, a missed payment p꧅uts the company at ri🍸sk of defaulting. That would cause a credit downgrade and could even force a bankruptcy.

Some preferred shareholders also have the right to 澳洲幸运5官方开奖结果体彩网:convert their preferred stock into common stock at a predetermined exchange price. In the event of bankruptcy, preferred shareholders receive company assets before 澳洲幸运5官方开奖结果体彩网:common shareholders.

Why Corporations Supply Preference Shares

Companies that offer preferred shares instead of issuing bonds can accomplish a lower 澳洲幸运5官方开奖结果体彩网:debt-to-equity ratio. That allows them to gain significantly more future financing from new investors. A company's debt-to-equity ratio is one of the most common metrics used to analyze the financial stability of a business. The lower this number is, the more attractive the company looks to investors. Additionally, bond issues can be a red flag for potential buyers. The strict schedule of repayments for debt obligations must be maintained, regardless of the company's financial circumstances. Preferred stocks do not follow the same guidelines of debt 澳洲幸运5官方开奖结果体彩网:repayment because they are equity issues.

Corporations also might value preference shares for their call feature. Most, but not all, preferred stock is callable. After a set date, the issuer can call the shares at par value to avoid significant interest rate risk or 澳洲幸运5官方开奖结果体彩网:opportunity cost.

Although common stock is the most flexible type of investment offered by a company, it gives shareholders more control than some business owners may feel comfortable with. Owners of preference shares do not have normal voting rights. That allows a company to issue preferred stock without upsetting controlling balances in the corpo🍸rate structure. Common stock provides a degree of voting rights to shareholders, allowing them an opportunity to impact crucial managerial decisions. Companies that want to limit the control they give to stockholders while still offering equity positions in their businesses may, therefore, turn to preferred stock.

Finally, some preference shares act as "澳洲幸运5官方开奖结果体彩网:poison pills" in the event of a 澳洲幸运5官方开奖结果体彩网:hostile takeover. They often take the form of a detrimental financial adjustment with the stock that can only be exercised when 澳洲幸运5官方开奖结果体彩网:controlling interest changes.

Investopedia does not provide tax, investment, or financial services and advice. The information is presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Investing involves risk, including the possible loss of principal. Investors should consider engaging a qualified financial professional to determine a suitable investment strategy.