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Types of Stock Ownership

Original post by Eric Feigenbaum of Demand Media

Not all stock is created equal. When companies go public, founders usually create several classes of stock -- some aimed to yield higher share prices and others to ensure founders retain control of their company. Before purchasing a company, investors should research the types of shares a company has issued along with the rights and benefits that go with each class of stock.

Contents

Common Stock

All publicly traded companies issue common stock, which forms most of the shares traded on stock exchanges worldwide. Common stock comes with no guarantees of dividend payments. However, holders of common stock can usually vote for directors and on issues set before shareholders. Most of the time, shareholders get one vote per share of stock.

Common Stock Variants

Some companies issue several classes of common stock, each with specific shareholder rights. Company founders may create Class A common stock that allows for multiple votes per share -- sometimes as high as ten. Although typical common stock has one vote per share, sometime special classes of common stock are entitled to no vote. Additionally, early investors in a company sometimes receive common stock with preemptive rights. These give shareholders the option of always maintaining their proportion of ownership, even when a company issues new shares of common stock. In essence, holders of shares with preemptive rights receive first right of refusal on new stock issuance.

Preferred Stock

Preferred stock shares are similar in some ways to bonds. They often come with a guaranteed dividend payment and preferred stock holders always receive dividend payments before common shareholders. In exchange for premium dividend payments, preferred stockholders give up the right to vote for directors.

Preferred Stock Variants

Companies do not have to pay dividends when profits don't exist. That's why some preferred stock shares are issued as cumulative shares, meaning they continue to "accrue" dividends due even when a company can't afford to pay. Later, when the company can pay dividends again, cumulative preferred stockholders receive backpay. Of course, some preferred stock is non-cumulative. Participating preferred shares get paid larger-than-promised dividends when a company has better than expected earnings. Convertible preferred stock shares come with the option to change shares into a predetermined number of common stock shares at the shareholder's discretion.


                   

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About the Author

Eric Feigenbaum started his career in print journalism, becoming editor-in-chief of "The Daily" of the University of Washington during college and afterward working at two major newspapers. He later did many print and Web projects including re-brandings for major companies and catalog production.


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