The proposed GM public offering has some unusual qualities. For starters, it's not very common for a company to have an IPO a year after filing for Chapter 11 bankruptcy.

It has another unique feature, as well: GM plans to issue preferred stock. Common stock will also be in the offering because the U.S. government and the United Auto Workers will sell a portion of their equity stakes.

As an investor, you have the option of buying either one. So which is better? It's too soon to tell because the details are somewhat sketchy (over the next few months, the transaction information will be released in revised filings). But there are some general principles to consider.

Common vs. Preferred Stock


Common stock is the most familiar to individual investors. This type of security represents a part ownership in a company and offers at least one vote per share for key matters like mergers. In some cases, companies may have different classes of stock, which provide various voting rights. For example, Google's (GOOG) stock has Class A and Class B versions. The former has only one vote per share and is owned by the public. The Class B shares are held by the founders and top executives and have 10 votes per share. This is a way to keep power within the hands of a few key people.

Common stock is also the riskiest security. In the event of a bankruptcy, the holders are the last in line to get any proceeds from the liquidation. In most cases, nothing is left. This is why the common stock of companies like Lehman Brothers and the old GM saw prices drop to pennies.

Preferred stock is a hybrid of common stock and debt. It also represents ownership in a company and will generally rise as a company increases its sales and earnings. And it has downside protection. Preferred shares get priority above common shareholders if there's a liquidation. Also, this type of security usually carries a high dividend. So, even as the company's fortunes weaken, the preferred shares may not decline as much because of the attractive yield.

As you can see, preferred shares have some nice benefits. In fact, they're usually the type of security sophisticated investors like venture capitalists prefer.

The GM Preferred

In the case of GM, it's proposed security is called a Series B mandatory convertible junior preferred stock. What does this mean?

First of all, the preferred stock will get dividends or liquidation proceeds before any common stockholder. However, it will be second in line -- or "junior" -- to the Series A preferred shares and all the other debtholders. In fact, GM can issue another series of preferred stock that has a higher priority than the Series B. At the same time, any new debt obligation has priority. Thus, even though the Preferred B shareholders have some protection, the stock is still at the bottom part of the spectrum.

Next, the Preferred B shares will carry a dividend, which will be paid quarterly and be cumulative. This means that if GM skips a dividend payment, it must be paid to the preferred shareholders before any new dividends are paid to common stockholders.

Finally, there is a mandatory conversion. Basically, the Preferred B shareholder can convert each unit into a fixed number of common shares (the ratio has yet to be determined). GM will then force the conversion of these securities by 2013.

Why would anyone convert before this deadline? For high-end traders, there could be arbitrage opportunities when there are discrepancies in the pricing of the common stock and the preferred stock. But for the most part, it seems unlikely there will be many conversions.

While the details of the Preferred B offering aren't yet finalized, it appears to offer an attractive investment opportunity for investors -- especially those who want some level of downside protection, which can be critical in the volatile auto industry.

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Jerry

Even if they pay back the entire 50,000,000,000.00, I will not buy their products and make a defacto campaign donation to the democrats through the UAW. I'm pro-gun, pro-life, anti-gay marraige, pro-tort reform, and for securing our borders....the democrats oppose me on all of these issues. The UAW gives almost 100% of their political money to dems, so I will give 0% of my money to them Sorry, I love their products, but need to be principled on this one.

August 20 2010 at 6:24 AM Report abuse +1 rate up rate down Reply
1 reply to Jerry's comment
merlin1649

Buying a foreign car will NOT secure our borders. It will only make this country weaker.

August 20 2010 at 7:37 AM Report abuse +1 rate up rate down Reply
bvg942

It's so nice that someone has finally explained the worth of preferred to me. As a holder of preferred GM (the old company) I have not only not gotten a dividend in 2 1/2 years (please remember I lent my money to GM before Mr. Obama & all the unions lent was their resentment to mgt. & forever health care). In these last years I called Detroit GM & was given a New York phone number. The were the recievership company for the successer of the old company. They said over these last few years,you will get after the bondholders. Well the gov't. has 51% of the company, the union has their piece of the company, even the rich funds have settled with the company & gotten there piece of the action. Those of us who are in the middle bought protection in our retirement by getting preferred are told,you will get what's left. My broker has told me it doesn't look good. That means that if you are the government,the union (before an election) or just plane rich, you may be able to sleep at night. If you are in the economic middle & put these investments in your retirement funds,when they screw up yet again & they will screw up again(it's the nature of the beast) you won't even be able to write them off as they are your retirement & you have no tax to write off!

August 20 2010 at 4:03 AM Report abuse -1 rate up rate down Reply
hemipwr54

Notice Warren Buffett is not touching GM IPO .

August 20 2010 at 1:03 AM Report abuse -1 rate up rate down Reply
hemipwr54

You do realize the Market is controlled by 18 to 24 years old snotty noised brats , with no clue what a Economy is and how not to destroy it !

August 20 2010 at 1:02 AM Report abuse -1 rate up rate down Reply
Gumby

If you hate Warren Buffett, buy GM IPO

August 20 2010 at 12:59 AM Report abuse rate up rate down Reply
Will

Liberals think business us in place to serve the "national interests" according to the President, or to support Unions or even employees no matter what they may desire. So here is the deal folks, busineses are in businesses to serve the owners or it is not a business.

August 19 2010 at 11:23 PM Report abuse +1 rate up rate down Reply
det11131

Are you people CRAZY? It would take a real fool to buy stock in GM. When will the stockholders be cheated again?

August 19 2010 at 11:22 PM Report abuse -1 rate up rate down Reply
Will

Hard to imagine that Obama will allow anyone else to run this company as a private business. Ownership rights will not be conveyed. For example, there is no chance Obama would permit GM to shut down / liquidate USA operations as no doubt they should be. GM USA is now smaller than GM China and no profit comes from USA operations - for Obama to permit this tossing out of the UAW is simply not possible.

August 19 2010 at 11:18 PM Report abuse +1 rate up rate down Reply
lhoward914

I got screwed the last time and wont be buying any this time around. I'll also be boycotting any investment firm or bank that buys.

August 19 2010 at 11:09 PM Report abuse +1 rate up rate down Reply
1 reply to lhoward914's comment
jbmcjbm

Just what a Neocon would say, screw the whole country cus I lost money, like nobody else did

August 19 2010 at 11:14 PM Report abuse rate up rate down Reply
jwallstrom

This IPO sounds great....until the Obama government decides to change the rules again and screw the shareholders.

August 19 2010 at 10:57 PM Report abuse -1 rate up rate down Reply
1 reply to jwallstrom's comment
jbmcjbm

Another Neocon Right Winger just waiting to help the country out

August 19 2010 at 11:15 PM Report abuse rate up rate down Reply