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