Canadian Securities Course (CSC) Level 1 Practice Exam

Why do companies issue preferred shares instead of common shares?

1. Preferreds instead of common shares if the stock is falling or inactive.

2. Common shares if the stock is performing well.

3. Preferreds also do not dilute the stocks value as would issuing new common shares.

4. Common shares instead of preferred based on higher voting rights.

The correct answer is: Preferreds instead of common shares if the stock is falling or inactive.

Companies may choose to issue preferred shares instead of common shares when the common stock is falling or inactive. Preferred shares typically offer a fixed dividend payment, priority over common shareholders in the event of liquidation, and do not usually carry voting rights. By issuing preferred shares, companies can provide a more stable income stream to investors without diluting the voting rights of existing common shareholders. This can be a strategic way for companies to raise capital without impacting the control of existing shareholders, especially during periods of market volatility or when common shares are underperforming.