Different types of stock

When the legal structure of the company is a corporation, the interest of its owners is represented by the stock (also called shares or securities). The owners of the corporation are shareholders or stockholders. The number of shares every shareholder possesses is equal to the percentage of interest he owns in the company.

 

There are two kinds of stock – common stock and preferred stock.

 

Common stock is ordinary shares of the company, which give its owner the right to vote on corporate matters, share profits of the business, and other rights and privileges that may be listed in the shareholders’ agreement.

 

Preferred stock is a stock superior to common stock because certain preferences are associated with it. Typically these are a) dividend preference which states that common stock holders cannot participate in the share of profits until all preferred stockholders are paid; b) liquidation preference, which gives its holders priority in distribution of the proceeds in case of the company liquidation; c) voting preference, which allows its holders additional votes or exclusive voting power on certain corporate matters; d) the right to the board representation; e) anti-dilution provisions; and f) any other features which may be desirable in each particular business scenario. Preferred stock was created to give companies the opportunity to raise funds while affording certain protections to the investors.

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