Preferred vs Common Stock
Some corporations issue both common and preferred stock. Each provides
unique benefits to investors. Both common and preferred shareholders own a
company, so the two types vary largely by rights. Common stock confers voting
and pre-emptive rights. Preferred stock may trade voting and pre-emptive rights
for dividends and a higher claim to liquidated company assets than common
stock.
SHAREHOLDER RIGHTS AND PRIVILEGES
Both common and preferred shareholders have the following rights and
privileges (although preferred shareholders may have theirs restricted or
applied only in certain situations).
VOTING RIGHTS
Owners of common stock have the right to vote on company matters. For
example, they can vote on whether to allow a stock split, or whether the
objective of the company should be changed. They cannot, however, vote on
whether dividends should be distributed.
A shareholder has one vote for each share owned. To cast their votes, most
shareholders use a form of absentee ballot called a proxy.
Shareholders also elect the management of the corporation. There are two
methods of voting. The statutory method provides one vote per share for each
vacant seat; this method benefits those who hold many shares. The cumulative
method allows those who do not own many shares to have as many votes as
there are seats to be filled. Shareholders can cast all their votes for one
candidate or distribute their votes among several. For example, if five directors
were to be elected, an owner of 30 shares of stock with the cumulative voting
right would have 150 votes that they could cast for one director or spread
among the five directors.
PREEMPTIVE RIGHTS
Preemptive rights may give shareholders the right to keep their proportionate
ownership of the company. If the company offers a new issue of stock to the
public, shareholders are accorded the right to buy new shares to keep their
percentage of ownership the same. With preemptive rights, they can maintain
voting control, share of earnings and share of assets.
Preemptive rights let common shareholders buy new shares of stock before non-
stockholders. Thus, these rights assure the keeping of previous percentages of
ownership. They must be exercised within 45 days. If they are not, the company
may sell the stock to non-shareholders.
OTHER RIGHTS OF COMMON STOCKHOLDERS
Shareholders have the right to inspect the books and records of the company.
They also have the right to sue the management for any unauthorized activities.
They have the privilege of receiving dividends as cash, stock or property. The
board of directors, however, is allowed to forego paying dividends if it feels that
doing so is against the best interests of the corporation.
Stockholders also have the right to receive distributions of any remaining assets
should the company go out of business. However, as stated before, they are
last in line for the asset-claiming privilege. Preferred shareholders are paid
before common shareholders.
AN OVERVIEW OF COMMON STOCK
Common stock represents ownership in a corporation.
Common stock dividends may be paid in cash, stock or property. The most
common payment method is a cash dividend. The board of directors determines
whether or not to pay dividends to common shareholders. Increases or
reductions most frequently depend on how well the company is performing. In a
weak economy the company may even suspend dividends until its balance
sheet improves.
Should the corporation issuing the stock go bankrupt and have to sell its
assets, common stockholders will receive the assets, but only after all other
creditors, bondholders and preferred stockholders receive them first.
TYPES OF COMMON STOCK DIVIDENDS
Common stock pays dividends in three forms: cash, stock and property. Let's
take a look at each one.
Cash dividends are those that are paid out in cash form. They are treated as
investment income and are taxable in the year they are paid.
Stock dividends are dividends paid out in the form of additional stock shares in
the corporation, or shares of a subsidiary corporation. They are usually issued
in proportion to shares owned. For example, for every 100 shares of stock
owned, a 4 percent stock dividend will yield four extra shares. When the
company distributes these new shares to investors, the price of each share
decreases to account for the new shares. This is a recalculation of cost basis. It
means that the stock dividends will not be taxed when distributed.
Stock dividends benefit the company by conserving its cash and they benefit
the shareholder by increasing his/her number of shares of the company.
Property dividends are paid with assets owned by the issuing company.
Property dividends are usually paid in the form of products or services that the
corporation produces. Often the corporation, when paying property dividends,
will use securities of other companies owned by the issuer.
This concludes our look at common stock. Read below to learn about preferred
stock ownership.
PREFERRED STOCK
Preferred stock also represents ownership in a corporation.
Preferred stock promises guaranteed dividends and a claim on a company's
assets that is above that of common shareholders. The tradeoff may be that
preferred shareholders cannot vote or share other specified rights. Preferred
stock pays a fixed dividend that is specified and set down in advance. Unless
the stock is retired or called back, it will continue paying dividends forever.
Preferred stock is usually issued with a $100 par (face) value. The dividend
payments are a fixed percentage of the par. For example, if the par value of a
stock share were $100 with a 6 percent annual dividend rate, the annual
dividend would be $6 on that share. In recent years, some companies have also
begun issuing preferred shares with variable rates tied to interest rates.
The par value is the most that the shareholder will receive if the company
declares bankruptcy. Preferred stock is generally issued at its par value.
TYPES OF PREFERRED STOCK
Preferred stock further divides into four types: cumulative, non-cumulative,
participating and convertible.
Cumulative preferred stock accords its owner a continuous claim to his or her
dividends. Any unpaid dividends accumulate until the corporation resumes
paying them. Since the cumulative preferred owner is entitled to all past and
present dividends, he or she is paid before common shareholders once
payment is resumed. If the board of directors suspends dividends, the
shareholder still has a claim on them.
Non-cumulative (straight) preferred is the opposite of cumulative preferred: it
doesn't confer a steady claim on dividends in the event of a dividend
suspension. Shareholders of this type may not be paid any missed dividends
prior to payments being made to the common shareholders.
Participating preferred shareholders receive extra dividends over their nominal
ones when the company makes an extra profit and the board of directors
declares dividends.
Convertible preferred stock may be converted to a certain number of shares of
common stock. Preferred investors who want the opportunity to share in the
appreciation of the company's common stock may find this option attractive.
Preferred stock has features other than fixed, steady dividends. The next
section will explain these features.
FEATURES OF PREFERRED STOCK
LIMITED VOTING RIGHTS
Preferred stockholders may be limited to voting only in these situations:
When the company wants to merge with another
When the company wants to liquidate a large portion of its assets
When the company wants to issue new bonds or preferred stock
CALL PROVISIONS
Preferred stock may carry a call provision. This means that the issuing company
can repurchase the stock from the shareholders. Though preferred stock is
usually called at par value, some call provisions actually tack on a premium.
Because of the steady dividends accorded to preferred shareholders, call
provisions are not usually advantageous to them, despite any premiums.
However, a corporation may use calls as a way to eliminate dividends, thus
increasing earnings for common shareholders.
Some corporations issue both common and preferred stock. Each provides
unique benefits to investors. Both common and preferred shareholders own a
company, so the two types vary largely by rights. Common stock confers voting
and pre-emptive rights. Preferred stock may trade voting and pre-emptive rights
for dividends and a higher claim to liquidated company assets than common
stock.
SHAREHOLDER RIGHTS AND PRIVILEGES
Both common and preferred shareholders have the following rights and
privileges (although preferred shareholders may have theirs restricted or
applied only in certain situations).
VOTING RIGHTS
Owners of common stock have the right to vote on company matters. For
example, they can vote on whether to allow a stock split, or whether the
objective of the company should be changed. They cannot, however, vote on
whether dividends should be distributed.
A shareholder has one vote for each share owned. To cast their votes, most
shareholders use a form of absentee ballot called a proxy.
Shareholders also elect the management of the corporation. There are two
methods of voting. The statutory method provides one vote per share for each
vacant seat; this method benefits those who hold many shares. The cumulative
method allows those who do not own many shares to have as many votes as
there are seats to be filled. Shareholders can cast all their votes for one
candidate or distribute their votes among several. For example, if five directors
were to be elected, an owner of 30 shares of stock with the cumulative voting
right would have 150 votes that they could cast for one director or spread
among the five directors.
PREEMPTIVE RIGHTS
Preemptive rights may give shareholders the right to keep their proportionate
ownership of the company. If the company offers a new issue of stock to the
public, shareholders are accorded the right to buy new shares to keep their
percentage of ownership the same. With preemptive rights, they can maintain
voting control, share of earnings and share of assets.
Preemptive rights let common shareholders buy new shares of stock before non-
stockholders. Thus, these rights assure the keeping of previous percentages of
ownership. They must be exercised within 45 days. If they are not, the company
may sell the stock to non-shareholders.
OTHER RIGHTS OF COMMON STOCKHOLDERS
Shareholders have the right to inspect the books and records of the company.
They also have the right to sue the management for any unauthorized activities.
They have the privilege of receiving dividends as cash, stock or property. The
board of directors, however, is allowed to forego paying dividends if it feels that
doing so is against the best interests of the corporation.
Stockholders also have the right to receive distributions of any remaining assets
should the company go out of business. However, as stated before, they are
last in line for the asset-claiming privilege. Preferred shareholders are paid
before common shareholders.
AN OVERVIEW OF COMMON STOCK
Common stock represents ownership in a corporation.
Common stock dividends may be paid in cash, stock or property. The most
common payment method is a cash dividend. The board of directors determines
whether or not to pay dividends to common shareholders. Increases or
reductions most frequently depend on how well the company is performing. In a
weak economy the company may even suspend dividends until its balance
sheet improves.
Should the corporation issuing the stock go bankrupt and have to sell its
assets, common stockholders will receive the assets, but only after all other
creditors, bondholders and preferred stockholders receive them first.
TYPES OF COMMON STOCK DIVIDENDS
Common stock pays dividends in three forms: cash, stock and property. Let's
take a look at each one.
Cash dividends are those that are paid out in cash form. They are treated as
investment income and are taxable in the year they are paid.
Stock dividends are dividends paid out in the form of additional stock shares in
the corporation, or shares of a subsidiary corporation. They are usually issued
in proportion to shares owned. For example, for every 100 shares of stock
owned, a 4 percent stock dividend will yield four extra shares. When the
company distributes these new shares to investors, the price of each share
decreases to account for the new shares. This is a recalculation of cost basis. It
means that the stock dividends will not be taxed when distributed.
Stock dividends benefit the company by conserving its cash and they benefit
the shareholder by increasing his/her number of shares of the company.
Property dividends are paid with assets owned by the issuing company.
Property dividends are usually paid in the form of products or services that the
corporation produces. Often the corporation, when paying property dividends,
will use securities of other companies owned by the issuer.
This concludes our look at common stock. Read below to learn about preferred
stock ownership.
PREFERRED STOCK
Preferred stock also represents ownership in a corporation.
Preferred stock promises guaranteed dividends and a claim on a company's
assets that is above that of common shareholders. The tradeoff may be that
preferred shareholders cannot vote or share other specified rights. Preferred
stock pays a fixed dividend that is specified and set down in advance. Unless
the stock is retired or called back, it will continue paying dividends forever.
Preferred stock is usually issued with a $100 par (face) value. The dividend
payments are a fixed percentage of the par. For example, if the par value of a
stock share were $100 with a 6 percent annual dividend rate, the annual
dividend would be $6 on that share. In recent years, some companies have also
begun issuing preferred shares with variable rates tied to interest rates.
The par value is the most that the shareholder will receive if the company
declares bankruptcy. Preferred stock is generally issued at its par value.
TYPES OF PREFERRED STOCK
Preferred stock further divides into four types: cumulative, non-cumulative,
participating and convertible.
Cumulative preferred stock accords its owner a continuous claim to his or her
dividends. Any unpaid dividends accumulate until the corporation resumes
paying them. Since the cumulative preferred owner is entitled to all past and
present dividends, he or she is paid before common shareholders once
payment is resumed. If the board of directors suspends dividends, the
shareholder still has a claim on them.
Non-cumulative (straight) preferred is the opposite of cumulative preferred: it
doesn't confer a steady claim on dividends in the event of a dividend
suspension. Shareholders of this type may not be paid any missed dividends
prior to payments being made to the common shareholders.
Participating preferred shareholders receive extra dividends over their nominal
ones when the company makes an extra profit and the board of directors
declares dividends.
Convertible preferred stock may be converted to a certain number of shares of
common stock. Preferred investors who want the opportunity to share in the
appreciation of the company's common stock may find this option attractive.
Preferred stock has features other than fixed, steady dividends. The next
section will explain these features.
FEATURES OF PREFERRED STOCK
LIMITED VOTING RIGHTS
Preferred stockholders may be limited to voting only in these situations:
When the company wants to merge with another
When the company wants to liquidate a large portion of its assets
When the company wants to issue new bonds or preferred stock
CALL PROVISIONS
Preferred stock may carry a call provision. This means that the issuing company
can repurchase the stock from the shareholders. Though preferred stock is
usually called at par value, some call provisions actually tack on a premium.
Because of the steady dividends accorded to preferred shareholders, call
provisions are not usually advantageous to them, despite any premiums.
However, a corporation may use calls as a way to eliminate dividends, thus
increasing earnings for common shareholders.
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