Types of Stock

By the end of this article, you will be able to define common stock and preferred stock and differentiate between these two types of stock.

Common Stock

Common stock is a form of ownership and equity, different from preferred stock, that still earns rights of ownership for its shareholders.


LEARNING OBJECTIVE

  • Describe what benefits a common shareholder receives

KEY POINTS

    • Common stock is a form of equity ownership. It is a type of security that is also known as a voting share or an ordinary share.
    • Common stock shareholders will not receive assets after bankruptcy unless the bondholders, other creditors, and preferred shareholders are paid first. Common shareholders also do not get dividends unless preferred shareholders receive them first.
    • Common shareholders do receive voting rights. Some shareholders may also be able to exercise preemptive rights.

TERMS

  • Common stock

    Common stock is a form of equity and type of security. Common stock shareholders are at the bottom of the line when it comes to dividends and receiving compensation in the case of bankruptcy.

  • equity

    The residual claim or interest to investors in assets after all liabilities are paid. If liability exceeds assets, negative equity exists and can be purchased through stock.

  • dividend

    Dividends are payments made by a corporation to its shareholder members.

Common stock is a form of corporate equity ownership, which is a type of security . The terms "voting share" or "ordinary share" are also used in other parts of the world. "Common stock" is used primarily in the United States. It is called "common" to distinguish it from preferred stock. If both types of stock exist, common stock holders cannot be paid dividends until all preferred stock dividends (including payments in arrears) are paid in full. Should bankruptcy occur, common stock shareholders receive any remaining funds after the bondholders, creditors (including employees), and preferred stockholders. Such shareholders usually receive nothing in the case of company liquidation.


New York Stock Exchange: Stocks can be bought and sold on exchanges, like the New York Stock Exchange shown above.

While Common stockholders are generally last in line among other creditors to receive assets should the business in question go bankrupt, common shares do tend to perform better than preferred shares over time. Also, Common stock usually carries the right to vote on certain matters. These matters include but are not limited to deciding for who gets to sit on the board of directors of the company. However, a company can have both a "voting" and "non-voting" class of common stock. Common shareholders do not get guaranteed dividends, so their returns can be uncertain. It must be remembered that Preferred stock generally does not carry voting rights.

Holders of common stock are able to influence the corporation through votes on establishing corporate objectives and policy, stock splits, and electing the company's board of directors. Some holders of common stock also receive preemptive rights, which enable them to retain their proportional ownership in a company should it issue another stock offering.

Source: Boundless
Creative Commons License This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 License.