Different Types of Stocks Issued by Corporations
Stocks can fall into several classes, which are then grouped into either common stock or preferred stock.3 min read
What are the different types of stocks issued by corporations? These stocks can fall into several classes, which are then grouped into either common stock or preferred stock.
Stocks and Corporations
There are several reasons why a corporation issues stock to raise money. Some of the more common reasons to use the money include:
- Company operating expenses.
Stock represents the shares of ownership an individual or business has in a company. The rights granted to an owner can vary depending on the stock. Stocks are grouped into either one of two types: common stock or preferred stock. Companies have the option of issuing stock in several classes of stock and then grouping them into one of the two types.
The basic type of stock a company issues is referred to as common stock. There are no restrictions placed on who can buy common stock. With common stock, shareholders have an ownership interest in the company that entitles them to a portion of the earned profits. Those who invest in common shares usually receive at least one vote for each of their shares. Voting by the shareholders is a process used to elect board members and in providing input that influences company decisions.
A downside for shareholders is if the company must be liquidated due to bankruptcy, those holding common stock are the last to receive any money. First in line are any creditors, bondholders, and preferred stock shareholders.
Common Growth Stock
Common growth stock is considered the most familiar type or corporate stock. Owners of this type of stock reap two benefits: they are entitled to vote in shareholder elections and any increase in the corporation's value is a plus. Dividends paid to those who hold common growth stock is at the sole discretion of the board of directors. Many company boards never declare dividends for common growth stock.
Risk-tolerant investors often run the risk of losing their investment if a company goes bankrupt. However, they can also profit if perceptions of a company changes and they can buy the company's stock at a lower price and sell it at a higher price in the future.
Common Income Stock
A mature company, such as a public utility company, will rarely see a sudden increase in value. Investors in these types of companies are generally rewarded with regular high dividends. Holders of common income stock often have the same benefit as common growth stock in that they have the right to vote in shareholder elections. Whereas preferred stock stipulates dividends must be paid, common income stock has no such contractual obligation.
Investors who prefer a more conservative option choose common income stock over common growth stock since it provides a more secure source of income.
Preferred stock has advantages over common stock. These include:
- Most preferred stock shares are promised a dividend. Common shares are not.
- In most cases, common stocks do not receive a dividend before the promised dividend is paid to holders of preferred stock.
- Preferred stocks do not have voting rights but do have the right to company assets over common stock in cases of bankruptcy.
Callable Preferred Stock
Because preferred stock rarely appreciates in value even as the company expands and grows, those who invest in preferred stock run a lesser risk of losing their entire investment. In the event of a bankruptcy, the corporation must reimburse callable preferred stockholders first. Also, a corporation must pay preferred stockholders every time a dividend is declared.
At some point, holders of preferred stock may allow the corporation to redeem the stock (sell it back to the company) by a certain date for a specified price. This happens when the corporation can negotiate a more favorable dividend rate.
Convertible Preferred Stock
One of the benefits of convertible preferred stock is the investor benefits if the corporation has a sudden increase in its value. Another benefit of convertible stock is the holder may trade their shares for common stock by a specified date. Additionally, by holding convertible preferred stock, an investor can balance both the growth and the income to their advantage.
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