Final answer:
Preferred shares usually provide higher dividends, benefiting investors with more stable income. Companies issue preferred shares as a cost-effective way of raising capital. Investors consider the balance between future capital gains and the present benefits like dividends when making investment decisions.
Step-by-step explanation:
Preferred shares typically offer higher dividends than common stock, making them an attractive option for investors looking for steady income. The issuer benefits from preferred shares by receiving a generally lower cost of capital compared to other financing options, like issuing bonds, which could have higher interest rates.
When a company issues dividends, it shares a portion of its profits with stock owners based on the number of shares they own. For example, a dividend of 75 cents a share means that an owner of 85 shares would receive a total dividend payment. Companies known for consistent dividend payments, like Coca-Cola and electric companies, attract investors who often hold onto their stocks for the long-term benefits of these dividends.
Decisions regarding the issuance of stock, dividend payments, and reinvestment of profits are made by the management of the company, which can differ in private and public firms. Investors evaluate these decisions and determine their willingness to invest by assessing not only the potential capital gains from the sale of the stock in the future but also the dividends that may be paid out.