Advantages and Disadvantages of Preferred Stock

The Advantages of Preferred Stocks (or preference shares) are as follows:

1) The main benefit for the issue of preferred stock is that it raises capital for a company without sacrificing the control of company.

2) It is useful for corporate restructuring or reorganization (Corporate restructuring is the process of reconstructing a whole organization or certain divisions of a corporation).

3) A preferred stock is more flexible in comparison to debt when a company is financially distressed or when it comes to missing an annual payment.

The Disadvantages of Preferred Stocks are:

1) A company financing with preferred stock is obligated to pay its shareholders a fixed and regular dividend.

2) The cost of preferred stock financing is generally higher than that of debt financing. Preferred shareholders are compensated with a higher return as they are willing to accept the added risk of purchasing preferred stock rather than long-term debt.

* Next: Types of Preference Shares
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Kelvin Wong Loke Yuen is an experienced writer with a strong background in finance, specializing in the creation of informative and engaging content on topics such as investment strategies, financial ratio analysis, and more. With years of experience in both financial writing and education, Kelvin is adept at translating complex financial concepts into clear, accessible language for a wide range of audiences. Follow him on: LinkedIn.

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