Discussion 6: Equity Finance Alternatives

How would you describe preferred stock? Why is it referred often times as a "hybrid security?" Explain.

Preferred stock is considered to be a hybrid security because it combines two or more different financial instruments. Hybrid securities generally combine both debt and equity characteristics and preferred stock has characteristics of both debt and common stock but not any of the most desirable characteristics. Preferred stock are company shares that are sold by companies who are looking to raise capital for business operations or expansions but do not want to hassle with increasing common shares or increase debt obligations. Preferred stock acts more like bonds than stocks because they pay regular dividends.