COMMON AND PREFERRED STOCK

1. Shares
Shares represent a fraction of ownership in a business. A business may declare
different types (classes) of shares, each having distinctive ownership rules, privileges,
or share values. Ownership of shares may be documented by issuance of a stock
certificate. A stock certificate is a legal document that specifies the amount of shares
owned by the shareholder, and other specifics of the shares, such as the par value, if
any, or the class of the shares.
2. Stock
The stock of a corporation constitutes the equity stake of its owners. It represents the
residual assets of the company that would be due to stockholders after discharge of all
senior claims such as secured and unsecured debt. Stockholders' equity cannot be
withdrawn from the company in a way that is intended to be detrimental to the
company's creditors.
There are two main types of stock: common and preferred. Common stock usually
entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred
stock generally does not have voting rights, but has a higher claim on assets and
earnings than the common shares. For example, owners of preferred stock receive
dividends before common shareholders and have priority in the event that a company
goes bankrupt and is liquidated.
3. Common Stock
The type of stock that is present at every corporation. (Some corporations have
preferred stock in addition to their common stock.) Shares of common stock provide
evidence of ownership in a corporation. Holders of common stock elect the
corporation's directors and share in the distribution of profits of the company via
dividends. If the corporation were to liquidate, the secured lenders would be paid first,
followed by unsecured lenders, preferred stockholders (if any), and lastly the common
stockholders
4. Preferred Stock
When it comes to dividends and liquidation, the owners of preferred stock have
preferential treatment over the owners of common stock. Preferred stockholders
receive their dividends before the common stockholders receive theirs. In other words,

if the corporation does not declare and pay the dividends to preferred stock, there
cannot be a dividend on the common stock. In return for these preferences, the
preferred stockholders usually give up the right to share in the corporation's earnings
that are in excess of their dividends.
5. Features Offered in Preferred Stock

Nonparticipating vs Participating

Cumulative vs. Noncumulative

Callable

Convertible

Combination of Features

6. Types of Preferred Stock

In addition to straight preferred stock, there is diversity in the preferred stock
market. Additional types of preferred stock include:
a) Convertible preferred stock
b) Cumulative preferred stock
c) Exchangeable preferred stock
d) Perpetual preferred stock
e) Non-cumulative preferred stock
7. Features of Common Stock
a) Liquidity
b) Participating
c) Ownership

d) Higher risk
8. Types of common stock
a) Authorized stock
b) Issue stock
c) Treasury stock
d) Outstanding stock