Differences Between Common and Preferred Stock

There are also tax advantages to having two kinds of stock. You want the lowest price per share attributed to the common stock in order to issue it with the least tax consequences to those who work to earn the stock. You want the highest price per share associated with the stock you issue to cash investors. This distinction is important, because investors want the highest possible tax basis without paying more for the investment than its fair value. The common investors want the lowest value attributed so they don't get stuck with a tax liability for the shares they receive. This is one of the key issues for employee stock-ownership programs.

It's not uncommon for the value of preferred-stock shares to be 10 times that of common-stock shares, although ultimately, both types of stock are converted into common shares at the time of the public offering.