Preferred Stock vs Common Stock Crucial Decision for US Company Registration, Do You Know?

Preferred Stock vs Common Stock The Key Choice in Registering a Company in the U.S., Do You Know About It?

In the U.S., whether it's a startup or a multinational corporation, choosing the right equity structure is a crucial step in the company registration process. Preferred stock and common stock, as two main types of equity forms, have distinctions and application scenarios that directly affect the company's financing capabilities, shareholder rights, and future development paths. With the increasing activity in capital markets in recent years, discussions about these two types of equity have continued to heat up.

Preferred Stock A Safe Choice for Stable Returns

Preferred stock is a special type of equity between common stock and bonds, granting holders higher rights than common shareholders but with certain limitations. For example, when distributing profits, preferred stockholders usually enjoy priority rights, meaning they receive dividends before common stockholders. In the event of company liquidation or dissolution, the asset settlement order of preferred stockholders also takes precedence over common stockholders. These characteristics make preferred stock a relatively stable long-term investment tool.

Recently, Apple Inc., a major U.S. technology giant, announced a new preferred stock issuance plan in its second quarter 2025 financial report to support its expanding RD projects. This move drew significant attention because the introduction of preferred stock not only helps the company raise funds but also attracts investors seeking stable returns. As financial professionals pointed out, for conservative investors, preferred stock offers higher yields than traditional bonds while still retaining some opportunity to participate in company growth.

However, despite its many advantages, preferred stock is not suitable for all companies. Since the preferential terms of preferred stock may weaken the interests of common stockholders, some companies may cautiously consider adopting this form of equity. Especially during the startup phase, an excessive amount of preferred stock could lead to founders losing control over company decision-making.

Common Stock Flexibility and Risk Go Hand in Hand

By contrast, common stock emphasizes flexibility and potential gains more. Common stockholders have voting rights, can participate in major company decisions, and share dividends when the company makes a profit. However, common stock carries higher risks, particularly during economic downturns or when company performance is poor, as the value of common stock may significantly decrease or even become worthless.

In recent years, with increased support from U.S. capital markets for startups, more companies are choosing to attract early investors by issuing common stock. For instance, Tesla, an electric vehicle manufacturer, has conducted multiple common stock issuances in the past few years to accelerate its globalization strategy and technological upgrades. Although this approach increases financial pressure in the short term, it has won the company more market share and brand influence in the long run.

It is worth noting that the flexibility of common stock also manifests in its liquidity. Companies listed on U.S. stock exchanges allow their common stock to be freely traded in secondary markets, providing shareholders with the possibility of quick liquidation. At the same time, the price volatility of common stock makes it a representative of high-risk, high-return investments. As a Wall Street analyst said common stock is suitable for investors who are willing to take on certain risks while expecting high returns.

Preferred Stock vs Common Stock How to Make the Best Choice?

So, how should a company choose between preferred stock and common stock when registering? This requires a comprehensive consideration of various factors, including but not limited to the company's development stage, funding needs, shareholder composition, and future plans.

For mature enterprises, preferred stock may be a better choice. Such companies often have stable cash flows and mature business models, so they tend to attract risk-averse investors through preferred stock to reduce financing costs. For growing startups, common stock should be prioritized to attract more attention from venture capital institutions.

Of course, in reality, many companies do not rely solely on one type of equity but adopt a hybrid model. For example, some internet platforms issue both preferred stock and common stock at their initial public offerings IPOs to meet the needs of different investors. This approach ensures core team control while providing sufficient financial support for the company.

Summary

Whether it’s preferred stock or common stock, they are indispensable parts of modern corporate operations. In such a highly developed capital market as the U.S., correctly understanding the significance of these two types of equity is particularly important. Only by combining your own circumstances and reasonably designing the equity structure can a company ensure its survival and success in fierce market competition.

Looking ahead, with changes in the global economic environment and the advancement of technology, we have reason to believe that the application scope of preferred stock and common stock will further expand, providing companies with more diverse financing channels and development opportunities. As a well-known investment bank executive said equity design is not just a technical issue but also a strategic one. We hope every entrepreneur can find their optimal solution in this game of capital.