Is closely held stock really ‘preferred’?
July 9, 2019
Preferred stock is a hybrid security that shares some of the characteristics of both common stock and bonds. Like shares of common stock, preferred shares represent an ownership stake in a company for which its shareholders have a claim on its assets and earnings. However, while preferred shares are considered “equity,” they also have many of the same characteristics as a bond and other interest-bearing debt. And on a risk-return investment scale, preferred shares are much closer to bonds, etc. than to common shares since preferred shares have limited returns, limited growth potential, and are generally less risky.
While preferred stock shares may have advantages for a publicly held company and its shareholders, its benefits would likely be limited to a closely held company and its shareholders for several reasons. Consider the observations and characteristics in a comparison of preferred shares of the two types of entities.
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