What Are Different Types of Shares in a Corporation?
What are the different types of shares in a corporation? The two main types of shares in a company consist of common (or ordinary) and preferred shares.3 min read
2. Types of Shares: Preferred Stock
What are the different types of shares in a corporation? The two main types of shares in a company consist of common (or ordinary) and preferred shares.
Types of Shares: Common Stock
In order to meet their financing needs, it's quite common for corporations to issue preferred or common stock to raise capital. The type of financing raised will greatly depend on the ownership structure of the business. Publicly traded companies tend to prefer a simple structure with only one class of common stock. This is because it is easier to analyze the finances of the company and provides greater liquidity.
The most universal and frequently issued type of stock is common stock. Common stock will usually receive a dividend payout and confer voting rights. Investors will typically receive one vote per owned share. Investors are allowed to vote for the election of board members. Historically, common stock has returned a higher yield than corporate bonds.
Generally speaking, at low levels of risk, potential returns tend to be low as well. High levels of risk are typically associated with high potential returns. Common stock tends to be thought of as a higher risk because a company has the potential to go out of business, causing the investor to lose their entire investment. If a company liquidates or goes bankrupt, preferred shareholders and bondholders will get paid first. Any remaining funds will be used to pay common shareholders.
Common stock shareholders have control over the corporation through their voting rights. They're able to vote on:
- Electing board members
- Major corporate issues
- Stock splits
- Corporate objectives and policy
Voting rights will usually vary based on the type of stock that the company issues. For example, a Class A share may have five votes for each share of common stock, while a Class B stock may only have one vote per each share owned.
Each common share stock is equivalent to every other common share stock in its class. Therefore, ownership rights are consistent, and the only significant difference between the two shareholders is the number of shares that are owned.
A business must return shareholders' capital to them when the shareholders have voted to liquidate the company. Outside of this scenario, a company's management does not have to be concerned with losing the stockholders' capital.
Stockholders are allowed to buy and sell shares of stock without the approval of other shareholders. On the other hand, shareholders in a privately held company may have restrictions on their shares. Also, shareholders are allowed to be employees of the company. The company's board of directors will set the organization's policies and also represent the interests of the shareholders.
Types of Shares: Preferred Stock
Preferred stock shareholders do not have voting rights in the organization. Preferred shares tend to offer a higher dividend than common shares. There are many types of preferred stock, including:
For example, cumulative shares will entitle the stockholder to dividends in arrears. Meaning that if the payment of dividends has been skipped or suspended, they will receive their portion before common stockholders receive their share. Convertible shareholders are allowed to exchange their shares for common stock at a future point under specific conditions. Preferred stock is thought of as being similar to a corporate bond, but without the voting rights.
The two main advantages of being a preferred shareholder include:
- Guaranteed with a fixed dividend payment in perpetuity
- If the company is liquidated, the preferred shareholders are paid before common stockholders
Callable shares are preferred shares that the issuing company can choose to buy back at a fixed price in the future. This amount is usually paid at a premium. Please note, a good way to think of preferred stock is that it's somewhere in between a common share and a corporate bond.
Preferred stock usually has no maturity date, meaning it doesn't have an end date and it will get paid in perpetuity. It's also carried as equity on the organization's balance sheet. In contrast to a bond, preferred stock is issued with a par value, doesn't have voting rights, and is offered at a fixed distribution amount.
Common shares are ranked below preferred shares in a company's capital. Preferred shareholders will always receive their dividend payment before common stock shareholders, no matter the situation.
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