PennyPlayer

There are a number of different categories of stock that makes up a joint stock company. Two of which are the most fundamental ones: common and preferred Stock.

The most widely applied stock is called common stock. If an individual owns a share of common stock, that individual is issued a partial ownership of the company. A holder of common stock is given the right to vote in corporate decisions regarding company matters. Generally, the number of votes shareholders have in common stock is directly proportional to the amount of shares owned, but it may differ in some other joint stock companies. Although major decisions and movements are being passed down by the board of directors who own the company, common stock shareholders have the power to impact their perspectives in some manners as well.

Common stock shareholders are also in the authority of “preemptive rights”, which is a right they hold to maintain their proportional ownership in the company by purchasing a relative number of any future shares that will be issued. This gives them the right to buy as many shares as they desire to withstand their proportional ownership in the company. But, despite of these advantages, common stock shareholders do experience a major setback as they are being hindered to be the last in line to receive the company’s assets, behind preferred stock shareholders. The dividend payments are at first handed to all preferred stock shareholders of the company before they finally reach the hands of common stock shareholders, which can be very fatal should the company goes bankrupt because common stock shareholders are left with whatever remaining assets after all preferred shareholders and other creditors have been compensated in full.

Preferred stock however, is rather unvoiced and seemingly inferior to common stock due to the fact that it does not carry voting rights like the common stock does. But, preferred stock shareholders are given the privilege to be the first party to receive the dividend payments before any other shareholders of the company. And also what sets preferred stock apart from common is that it pays a fixed dividend that does not change in value, though the company is not required to pay this dividend if the company is financially-inadequate to do so. Therefore, in a case of company going bankrupt, preferred stock shareholders are guaranteed to be compensated in full, so that takes them away from having to be responsible for the liabilities. There are four kinds of preferred stock: cumulative, non-cumulative, participating, and convertible. Cumulative lets shareholders to accumulate all the omitted dividend payments if the company is having a financial crisis, while non-cumulative serves the exact opposite to cumulative whereby shareholders do not retrieve payments for skipped dividends. Participating preferred stock can have its dividend payments raised if a company unexpectedly turns a bigger profit. Convertible includes an option for the shareholder to convert the shares into a fixed number of shares of common stock.

As mentioned earlier, the fixed dividend payments of preferred shares tend to prevent the major changes in price, compared to common stock. As a result, preferred shareholders are more in a secure zone as they are limited in capital gains and losses. While on the other hand, though common stock can net shareholders more profit, it can make shareholders to lose a lot more as well. This class system is made to make it easier for primary owners to foresee things, to retain control over the business. So we may conclude that preferred stock is more suitable for those who want to play it safe, while common is for the big players.

Tags: Investment Strategy //