When the owners, or founders of a business decide to organize it as a corporate entity, ownership of the company is then realized via the possession of the corporation’s stock. A stock certificate, often referred to as a “share”, represents a share of the ownership of a corporation. Each share also grants its owner voting rights on matters concerning the corporation, and for those stock holders that own the majority of the shares, it allows them to have a controlling interest in a corporation. Profits generated by the corporation are distributed to the shareholders in the form of dividends paid for each share owned. The value of a corporation’s stock is based on a combination of the company’s net worth (known as book value) and its market value derived from its future earnings expectations.
SAMPLE OF A STOCK CERTIFICATE
In most cases, when a business is initially incorporated, the founders or original owners are in possession of all the stock. At this point the entity is considered a ”private corporation.” When the corporation commences capital raising activities, a portion of the corporation’s stock is made available to the public via an Initial Public Offering (IPO) and is then publicly traded on securities markets. The corporation is now considered a “publicly traded corporation” and is subject to the regulations and whims of the free market.
Once a corporation “goes public,” there are various options on the types of stock that it can choose to issue. Corporations vary on the types and amounts of stock that they put on the market based on their financial objectives. A corporation’s common stock can be characterized as the “base unit” stock. It is usually the largest amount of the stock issued by a corporation, and is typically the lowest priced. When securities markets and financial media publicize or report on a corporation’s stock price, they usually quote the price of the common stock. While common stock ownership does include voting rights on a one-vote per share basis, it does not guarantee dividends or a claim to the corporation’s assets. Dividends are paid to common stock shareholders when the corporate board members deem it appropriate. Also, common stock shareholders are last on the list of corporate payees should the corporation go bankrupt and have to liquidate its assets and distribute the proceeds to shareholders.
Another type of stock that corporations can opt to issue is Preferred Stock. A corporation’s preferred stock trades on a different ticker symbol and is typically price higher than the common stock. The corporation has the flexibility to adjust the provisions of ownership of a stock, therefore changing its value. Some of the conditions of ownership that a corporation may adjust include voting rights, dividend payments, or callability. Voting rights typically are not included with preferred stock, but a claim to the corporate assets is. Dividend payments for preferred stock are usually guaranteed, and are fixed indefinitely so long as an investor owns the stock. Also, corporations may reserve the option to re-purchase at any time, the preferred shares for any reason.
Convertible Preferred Stock
A third type of stock is a Convertible Preferred Stock. This type of preferred stock includes a provision for its owner to convert the preferred share to a specified number of common shares after a pre-determined date and/or price is exceeded. This type of stock gives an investor the flexibility to collect fixed dividends when a corporation is under-performing, and common stock shareholders are not being afforded a dividend. The investor can then convert to common stock when the corporation is experiencing better than average growth, and common stock shareholders are receiving higher dividends that are greater than the fixed dividends received by preferred shareholders.
Different Stock for Different Purposes
Having different types of stocks allows a corporation flexibility for achieving its financial objectives. It also allows investors and traders different options for undertaking their purpose in the financial markets. Common shares are defiantly better suited for short-term traders simply because they are more liquid and tradable at higher volumes. The long-term investor may be more interest in preferred stock which is more appropriate for a buy and hold strategy.