Why would an investor buy preferred stock?


1 Answer(s)


There are typically 2 kinds of stocks issued by a company; common stock and preferred stock. Preferred stock just like the name in the gates provides its holders some special rights that the common stock does not provide. When you buy stock in the company using a stock exchange, you are typically getting common stock with no special rights over the management. However when a large private equity investor is investing millions of dollars into a company, they would like to have some special rights to make sure their large amount of money is safe. For that purpose they demand that the company issues them preferred stock and not common stock.

Preferred stock - some of the special provision of stock has is; number 1 - board voting. A lot of preferred stock will have voting as a member of Board of Directors. Number 2 - a preferred stock would come with special returns. Apart from the money the preferred stock holder will get back by selling the shares, they might also negotiate for an added return on investment based on how competitive the funding process is. So preferred stock holder could make more money than a common stock holder while selling the shares.

Number 3 - if a company is being bankrupt, all the assets will be sold and first the preferred stock holders will be paid before the common stock holders can be paid. Another example of a condition is that preferred stock holders will negotiate for participation in the next round of financing, meaning if the company is going to raise more money next year, the preferred stock holder will demand that they also be involved in that round. These are some of the extra preference that a preferred stock holder gets in a company.