A corporation may issue several classes of common and preferred stock depending on its ownership structure and financing needs. The ownership structure can get quite complex, particularly in a privately held corporation as it goes through several rounds of financing, but investors in publicly traded companies prefer a simple ownership structure with one class of common stock for greater liquidity and ease of analysis.
Common stock confers voting rights on its holders--the ability to exercise control over a corporation by electing a board of directors and by voting on major corporate issues at annual meetings. A corporation may have two or more classes of common stock that have different voting rights. For example, Class A stock may have 10 votes for each share of common stock, while Class B may have one vote for each share of stock; or Class A may be voting and Class B may be non-voting. It may happen when owners or founders need to raise money but do not want to relinquish control so they retain the majority voting rights while selling a majority stake to investors, or when one company is controlled by another.
Preferred stock represents ownership in a corporation without voting rights. It is issued to income investors in exchange for high dividend income. There are several types of preferred stock, such as cumulative, convertible and participating, based on how the dividend is apportioned and paid, or on the ownership rights. For example, cumulative preferred stock entitles its holders to any dividends in arrears if the payment of dividends is suspended; convertible preferred allows its holders to exchange it for common stock under certain conditions.
Stock can also be classified as authorized, issued (or outstanding) and treasury. Authorized is the total number of shares a corporation is allowed to issue according to its charter. But it may not issue all the authorized stock at once, instead selling it periodically to raise money or to attract strategic investors. The total number of shares issued and in the hands of investors is called “shares outstanding.” Treasury stock is the stock that a corporation issued and subsequently repurchased on the open market.
- PassTrak Series 7 General Securities Representative License Exam Manual"; Dearborn; 2003
- FINRA: Stocks
- stock shares image by Bruce Shippee from Fotolia.com