Why is Capital Stock Important?

Capital stock is the way a company raises money to expand the business. An investor can buy stock from
a corporation and in return they hope to receive benefits known as dividends.
Companies can also issue stock in exchange for assets like buildings, land or equipment that they need
for their business.
The amount of capital stock issued to different people, whether investors or shareholders, decides the
percentage of the company that each person owns. For example, if there are 10,000 shares of capital
stock and an investor owns 5,000 stocks, he owns 50 percent of the company.

What are the Advantages of Capital Stock?

 The biggest advantage to selling capital stock is that a company does not need to take out debt
in order to finance new projects. If a company needs more money to grow, instead of taking out
a loan that they will have to pay back with interest, they can sell capital stock.

 It also allows them to make more money than they may have been able to get if they had to
take out a loan.

What are the Disadvantages of Capital Stock?

 By selling capital stock to investors, a company is giving up some of its equity.

 The more capital stock that gets issued, the more diluted the value of each share becomes.

Preferred vs. Common Stock: An Overview

There are many differences between preferred and common stock. The main difference is that
preferred stock usually does not give shareholders voting rights, while common stock does,
usually at one vote per share owned.1 Many investors know more about common stock than they
do about preferred stock.

Both types of stock represent a piece of ownership in a company, and both are tools investors can
use to try to profit from the future successes of the business.

KEY TAKEAWAYS

 The main difference between preferred and common stock is that preferred stock gives no
voting rights to shareholders while common stock does.
 Preferred shareholders have priority over a company's income, meaning they are paid dividends
before common shareholders.
 Common stockholders are last in line when it comes to company assets, which means they will
be paid out after creditors, bondholders, and preferred shareholders.