Corporate Stocks Types: Everything You Need to Know
Corporate stocks types represent an ownership interest in a corporation. This may be referred to as stocks or shares.3 min read
Corporate stocks types represent an ownership interest in a corporation. This may be referred to as stocks or shares. Before investing in stocks, it's important to understand if the corporation has one or more class of stocks.
A class is a group or type of stocks with identical rights. Within a class, every share is equal. However, a corporation can also issue different classes of stocks. You may see this denoted as Class A or Class B. As an example, a Class A stockholder may be allowed to vote for the board of directors while a Class B stockholder will not.
State laws tend to be pretty liberal when allowing companies to issue various classes of stocks even though the difference in shares can be significant. Historically, stocks represented the initial capital invested by founders. That stock proceeded to be fractionated into shares, or divisional ownership over the stocks. Today, the terms stocks and shares are interchangeable.
Today, some of the larger corporations may offer different types of stock options. These include:
- Common stock
- Preferred stock
- Stock with par value
- Stock with no par value
- Voting stock
- Nonvoting stock
- Outstanding stock
- Treasury stock
Stocks will also be assigned different designations. A company's Articles of Incorporation will detail the number of shares the corporation can issue. These comprise authorized shares.
A corporation isn't mandated to issue all of its authorized shares. The total stock sold to its investors becomes the issued stock, while the issued stock sold to shareholders becomes the outstanding stock.
Common Stock vs. Preferred Stock
Investors can own two different types of stock. They are:
- Common stock
- Preferred stock
Common stock represents ownership in the company, as well as a claim to a portion of the net profits. Common stockholders may also vote for the board of directors.
Common stock also represents shares in a corporation that don't have any priority over other classes. The number of votes per share, rights of distribution, and liquidation rights are the same for all shareholders.
Preferred stock represents a degree of ownership, but doesn't come with the same voting rights as common stock ownership. With preferred stocks, investors are usually granted a fixed dividend.
Preferred stock also awards its shareholders different benefits over common stockholders. That's why venture capitalists tend to go for preferred stock, in lieu of common stock.
Preferred Stock Rights
Here are a few reasons why venture capitalists tend toward preferred stocks:
- They offer priority over business assets if the company liquidates.
- They offer a priority on dividends.
- They offer special voting rights, including veto rights.
- They offer the right to force the company to buy back shares in the future.
- They offer the right to convert common stock when following a certain formula.
- They offer protection against anti-dilution rights, including stock splits and future issuances of cheap stock.
A company that issues stock will have a unique plan for dividend distributions and growth. That plan is reflected in the classification of stocks. They are as follows:
- Income stocks, which pay a quarterly dividend. These are usually considered high-quality companies with a strong history of profit and dividend increases.
- Value stocks, which tend to have low price-to-earnings ratios, low price-to-book ratios, and low price-to-dividend ratios.
- Growth stocks, which tend to include stocks of companies with increasing profits and a rise in the stock price. These companies like to reinvest their profits and pay very few dividends to their shareholders.
Market capitalization indicates the size of a company. You can calculate this by multiplying the number of outstanding shares by the current stock price.
The size of a company will be important to the price of the stocks because there is a direct correlation between risk and size.
Small companies tend to be riskier than large companies because they have fewer resources at their disposal. Meanwhile, corporations often choose to issue stocks to raise capital for operating expenses.
When an investor purchases a share of corporate stock, he now owns a portion of that company. Since stocks vary according to the rights of the owner, it's important to understand the risks and benefits of every stock you purchase.
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