Preferred Stock

Preferred stock is a type of security that has characteristics of both stocks and bonds. It pays a specified dividend and has priority over common stock when it comes to receiving dividends. Although it is not necessarily preferred by most investors, it usually pays out a higher yield than common shares.

In addition, when interest rates decline, it generally performs better. Preferred stock has a par value and can be redeemed when it matures. It can also be called or redeemed by the company on a specific date.

Some preferred stocks can be converted into a fixed number of common shares, but not the other way around.

Issuance of Preferred Stock Journal Entry

The issuance of equity securities with specific rights and privileges is recorded in an accounting journal entry. When issuing preferred stock, the journal entry includes the Cash account, Preferred Stock account, and Paid-in Capital in Excess of Par – Preferred Stock account.

Account	Debit	Credit
Cash	X
Preferred Stock		X
Paid-in Capital in Excess of Par–Preferred Stock		X

The Cash account is increased with the amount of money received for the issuance of preferred stock. The Preferred Stock account is credited with the par value of the preferred stock. Paid-in Capital in Excess of Par – Preferred Stock is also credited with the difference between the amount of money received and the par value, if any. The journal entry is the same for both common and preferred stock.

Preferred Stock Features

Equity securities with special rights and privileges are known as preferred stock. These securities have a variety of features that distinguish them from common stock, such as:

• Preference in dividends
• Preference in assets, in the event of liquidation
• Convertibility to common stock
• Callability (ability to be redeemed before maturity) at the corporation’s option (possibly subject to a spens clause)
• Nonvoting
• Higher dividend yields

Preferred stock is a popular form of financing for companies as it provides a fixed and predictable return for investors and does not dilute the ownership stake of the common shareholders. Furthermore, preferred stock does not typically have voting rights, which helps to protect the common shareholders from major decisions being made without their consent.

Benefits of Investing in Preferred Stock

Investing in preferred stock can provide investors with a number of benefits.

Firstly, preferred stock offers the potential for larger dividends compared to common stock.

Additionally, preferred stockholders have the first priority to receive dividend payouts ahead of common stock shareholders or creditors.

Moreover, preferred stockholders are typically guaranteed a fixed dividend payout amount, with payments occurring on pre-determined dates. This provides investors with the ability to accurately project their dividend income and plan accordingly.

Furthermore, preferred stockholders often have the option to convert their preferred shares into a set number of common stock shares at a predetermined price. This allows preferred stockholders to benefit from increases in the value of the underlying common stock.

Lastly, preferred stockholders are also able to benefit from tax advantages such as lower taxes on dividend income.

Preferred Stock Vs Common Stock

Comparing the two types of equity, preferred stock and common stock, can reveal significant differences in their respective features.

Preferred stock receives a fixed dividend, while common stock may not.

Moreover, preferred stockholders do not share in the price appreciation or depreciation of the company, while common stockholders do.

Additionally, preferred shareholders have no voting rights, while common stockholders do.

Lastly, preferred shares can be converted to common shares, but not vice versa.

Numerically, these differences can be further analyzed:

1. Preferred stock receives a fixed dividend, while common stock may not.
2. Preferred stock does not share in price appreciation or depreciation like common stock.
3. Preferred stock typically have no voting rights, while common stockholders do.
4. Preferred shares may be convertible to common shares, but not vice versa.

Conclusion

The issuance of preferred stock is a popular option for companies seeking to raise additional capital. It offers a number of advantages to investors, including added security and a fixed dividend rate. Furthermore, the features of preferred stock, such as voting rights and priority of claims in the event of liquidation, can make it an attractive option for investors.

When considering an investment in preferred stock, investors should weigh the benefits against the risks of the investment. Doing so can help ensure that the investment is a good fit for their individual needs.