What is preferred stock?
Preferred stock is a kind of stock, and the holder has the right to distribute the company's assets and profits first. Compared with common stock, preferred shareholders usually have no right to participate in the operation of the company. Shareholders who hold preferred shares cannot voluntarily withdraw their shares, but can only redeem them through the company according to the redemption terms of preferred shares.
However, preferred stocks can pay dividends steadily. When the company pays dividends, shareholders holding preferred shares distribute dividends earlier than shareholders holding common shares and are entitled to a certain amount of dividends.
What are the advantages and disadvantages of preferred stock?
1 Advantages of preferred stock
1. When a listed company is in financial crisis, the dividend of preferred stock is not the legal debt that the issuing company must pay, so it can reduce the financial burden of the enterprise. Moreover, from the creditor's point of view, preferred stock belongs to the company's share capital, so it consolidates the company's financial situation and improves the company's borrowing ability, so in general, it reduces financial risks.
2. Preferred stock is essentially a perpetual loan with no fixed term. Therefore, enterprises can withdraw preferred shares at any time under favorable conditions, which has great flexibility.
3. Preferred stock does not affect the common shareholders' control over the enterprise.
2 disadvantages of preferred stock
1. Preferred shares cannot be deducted from income tax, and the cost of capital is higher than liabilities, which may also produce financial leverage effect, which will bring greater pressure on corporate finance, which is also the biggest disadvantage of preferred shares.