Securities may be issued as equity securities (shares of company stock) or as debt (company or government bonds, notes, or paper). Common stock typically grants its owners the right to vote and (if authorized by the company’s board of directors) receive dividends. Preferred stock is a hybrid security with characteristics of both debt and equity. Payments to preferred stockholders are called preferred dividends and are based on a contract promising payments of fixed size, similar to interest payments on debt (though taxed differently).

Why does it matter whether an instrument is characterized as debt versus equity?

The characterization of an instrument as debt vs. equity can change how the company accounts for a transaction (e.g., impact of debt vs. equity on balance sheet), as well as how taxes are paid (see Structuring Transactions).

In addition to accounting and tax considerations, what other considerations might come into a decision to use debt or equity financing?

Market conditions matter, and these are ever-changing. Companies using their stock to buy other companies generally prefer to do so when their stock prices are up—a difficult call in a volatile market. Debt markets have ups and downs too. The Federal Reserve Banking System collects and disseminates information on commercial paper with respect to both volume and rates.