Preferred Stock

Preferred stock stands out from common stock in that it gives its holders higher rights over assets and profits of the issuer. Additionally, the holders usually get dividends before those with common stocks, and are prioritized if liquidation takes place.

A Scenario : Understanding Preferred Stock

Jane is a new entrepreneur who has recently set up her tech-based business. She has been putting in lots of effort to develop her product and bring in customers, however, she needs additional financing to take it to the next level.

To gain capital, she opted to offer preferred stock – a form of equity financing. Preferred stockholders receive priority over dividend payments compared to common stock holders. With this type of investment, investors are promised a fixed return in the form of dividends.

Jane’s organisation rewards the investors for their investment by distributing a fixed quantity of preferred stocks.

Investors are drawn to Jane’s business given its strong growth rate and the promise of long-term returns.

Through her preferred stock offering, she has secured the necessary funds to hire more personnel, widen her product range and strengthen her marketing endeavors. This will greatly help in boosting business growth.

The more successful her company becomes, the more valuable her preferred stock becomes – leading to increased investment opportunities. Investors are enticed by being a part of the business and reaping the rewards that come with it.

In this scenario, Jane’s business was able to access the necessary funding and continue to expand through the use of preferred stock. Not only did it provide her with capital, but also enabled investors to benefit from potential returns. The chosen financing option allowed Jane to remain in control of her company while obtaining the requisite funds.