Common and preferred stocks are both examples of what type of financing?

Common and preferred stocks are both examples of equity financing because they represent ownership in a company. When individuals invest in these types of stocks, they are essentially buying a share of the company, which gives them a claim on a portion of the company's assets and earnings.

Equity financing is distinct from debt financing, where funds are borrowed and must be repaid with interest. In the case of stock investments, there is no obligation to repay the invested amount, and shareholders typically benefit from the company's growth and profitability through dividends and appreciation of stock value.

Preferred stocks offer certain advantages, such as fixed dividends and priority over common stocks in asset liquidation, but both types of securities still embody the fundamental principle of equity financing. This means that investors take on more risk compared to debt financing since their returns are dependent on the company's performance, yet they also have the potential for greater rewards if the company thrives. Selecting equity financing as the correct answer helps clarify the nature of stock investments in the context of funding a business.