Forms of Stocks – Common Stocks & Preferred Stock

 

 

 

There are two most typical forms in which companies can offer stocks for sale, namely: Common Stocks and Preferred Stocks. We shall see the difference between the two as we progress.

 

A newly established company usually has family and near relatives as initial investors who own specified amounts of shares. As the company grows, it may need to expand its capital base. As a result, the company would have to raise funds for that reason, and so the need to sell shares originally owned by the initial investors may arise.

 

While this will reduce the percentage of shares held by each of the initial shareholders, it is in the best interest of the company to sell some shares to interested investors to gain more cash.  Rather than keeping them private, the initial investors can offer the shares in the Initial Public Offer (IPO) so that new investors from the public can buy them. These forms of shares are usually classified as, common stocks.

 

 

Common Stocks

 

Common stocks are the usual stocks which are issued by companies to shareholders. Common stock holders are entitled to dividends (which could be monthly or quarterly), as well as voting rights in the selection of board members.

 

Common stocks are usually more risky to invest in but yield higher returns on investment. But if a company goes bankrupt, common shareholders may record more losses than bondholders since they are least in priority and have to be paid off only when the creditors and the preferred shareholders have been paid, a situation which usually sees the common shareholders getting little or nothing.

 

 

 

Preferred Stock

 

Preferred stocks, just like bonds, earn the bondholders fixed dividends as against variable dividends earned by shareholders. Preferred stock holders are however not eligible for voting members of the board, even though these restrictions can be overruled by certain companies.

 

Preferred stocks are usually offered at a premium and can be re-purchased by the issuing company upon need by buying back from the stock holders. Holders of preferred stocks are usually second in priority of compensation after the bondholders in event of declaration of bankruptcy by the company. In other words, preferred stocks are second in priority after bonds, with common stocks coming last. But then, common and preferred stocks are the most common forms of stocks although companies can make adjustments to these to meet investor’s demand. This will also help in classifying shareholders so as to vary the weight of the voting rights of different shareholders.

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