Common Stock & Preferred Stock

Common stock and preferred stock are great investment vehicles and tools by which to raise capital. The common stockholder enjoys voting rights, the first option to purchase new stock shares being offered and they hold the residual claim to income (Block, Hirt, Danielsen, 2009, p. 531). Being able to cast votes for candidates to the board of directors enables the stockholder to influence the make-up of the board and work toward policies they see as most pertinent to the operations of the business. The first option to purchase new stock shares enables greater voting power and influence of the board. Owners of common stock have the potential to hold a majority portion of the company issued shares outstanding. This potential ability enables the majority shareholder to make most or all decisions concerning the corporation or to at least have significant influence in those decisions. Additionally, common stockholders are also entitled to residual claim to income which translates to receiving dividends (part of the corporate retained earnings).

Preferred stockholders generally do not hold voting rights; although they are able to exercise voting rights when corporate agreements have been broken. Preferred stock does not hold residual claim to income but do receive dividends before common stockholders. Those dividends are also usually cumulative dividends; meaning the company can skip a year of issuing dividends but must pay the dividends in arrears prior to issuing common stock dividends (Block, Hirt, Danielsen, 2009, p. 543).

As a financial manager, the decision to issue preferred or common stock is a tough one. However, I believe issuing preferred stock would be the more practical security to issue. Even though the company must pay dividends to preferred holders first and those holders must be among the first debts settled in cases of bankruptcy, the cost to issue the preferred stock is less than common stock and these stockholders have no voting rights....