Learn The Risks, Rights and Privileges Included In Different Types Of Stock

jaschmidt | Dec 16, 2009 |

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A stock is a certificate to show proof that you have invested some funds to a company. Any stockholder therefore can claim ownership over its assets and income in proportion to the number of stock bought against the number of stocks issued by the company. The more stocks owned the greater the claim to the company. However, there are different types of stock and we'll take a closer look at each of them.

A corporation has the right to issue different types of stock namely: common and preferred stocks.

Common Stocks

When no other type of stock is issued, the stock referred to will refer to common stocks. A holder of a common stock, enjoy identical rights and privileges given by the corporation to all of its stockholders. There is no preferential treatment recognized in favor of one stockholder over one another. However, a common stockholder earns a voting right in the decision making process in any major change or venture in the company.

Common stocks held over a long period of time, are said to have the highest risks over all other different types of stock. If a company declares bankruptcy, the shareholders of common stocks have the least priority in the payment of their investment and its return if any. It is only after the creditors, or the bondholders and the preferred stock shareholders have been compensated that the remaining funds realized through the liquidation of the company's assets will be distributed to the common stockholders.

Preferred Stocks

Preferred stock is a different type of stock in the sense that their right of ownership to the company does not entail voting rights. The matter of preference is applicable in the company's dividend declaration. Preferred stockholders enjoy the rights and privileges of being paid first over common stock shareholders and are guaranteed with a fixed dividend for as long as the company is operational. In case of liquidation or bankruptcy, preferred stock holders have first priority over common stockholders in the distribution of liquidation proceeds.

However as different types of stock, the company holds the right to buy back preferred shares if and when it is deemed necessary and subject to approval of the common stockholders in concurrence with the Board of Directors' recommendations and approval. Often, the recall or buy-back of preferred shares is given at the best rate.

Different Types of Stock – Customized

Aside from these two conventional types of stock, a company may choose to customize shares of ownership by classifying them into different types of stock. This is often called for to distinguish the voting rights each class or type of common stock that a shareholder owns. The different types of stock within a company's common stockholdings may be classified by affixing a letter or a combination of the company code plus a letter. Examples would be Class A, Class B, or Class JAS-A, Class JAS-B. As further example, the first class will be entitled to voting rights of 10 votes per share while the 2nd class, will be entitled as any common shareholder is entitled to which is one vote per share.

Different Types of Stock According to Earnings

There are other different types of stock and this pertains to the rights of the shareholders to receive dividends. They may be noncumulative, cumulative, nonparticipating or participating.

Noncumulative preferred stocks are not retroactive in the sense that non-dividend declaration in a given year will not be recognized as a liability of the company for the succeeding years. If the profit for a particular year does not merit dividend declaration, dividend earnings remain at zero status. In the same way that future dividends will pertain only to the earnings of that particular year of operation wherein favorable results merited a declaration of dividends.

On the other hand, cumulative preferred stocks enjoy the right of accumulating rights to profit in any given year regardless of the year that the dividend declaration will be distributed. For as long as a cumulative preferred stock owner owns a share, he will be entitled to earnings based on a fixed percentage or amount.

The issuance of different types of stock depends upon the type of business. The business has the option to choose the total of capital stock, par value and number of shares it is divided. The Securities and Exchange Commission (SEC) has jurisdiction over the issuance of different types of stock since they are tasked to control the initial offering as well as the sale of securities. Hence, any issues or disputes regarding the ownership of different types of stock on a company and over the earnings, rights and privileges related to it can be brought to the SEC for judgment.