Businesses source money for their operations through debt and equity capital. Debt capital is the loan that the company procures from investors. Equity capital affords ownership rights for investors. Equity capital comes in two forms--common stock and preferred stock. The basic function of both these forms of equity is different. The company issues common stock for risk-taking individuals. Every quarter that a business makes profits the common stockholders might receive dividends, after the company discharges all its financial obligations and pays dividends to preference shareholders. Preferred shareholders get preferential treatment over common stockholders in dividend payments and payments when the company is liquidated.
Dividends
Stockholders may be paid dividend income during a quarter that a company makes profits. The sequence of payments is that the company first pays obligations like interest payments to creditors, tax obligations, and reinvestments back into the business for expansion. The company then pays preferred stockholders before paying common stockholders. The same sequence is followed in case the company is liquidated. Creditors have legal claims on a company’s assets and stockholders can only take what remains after all financial obligations have been met.
Voting Rights
Common stockholders are owners of a company. They have voting rights in the company based on the number of stocks owned. For example, a stockholder who owns 1,000 common stocks out of the total issued 100,000 shares, owns 1 percent of the stock, and thus has 1 percent voting rights. Preferred stockholders do not have any voting rights in the company. Though they, too, are owners of stock, they have no say in the conduct of the business. Preferred stockholders have the option of converting stocks to common stocks whenever they desire.
Preemptive Rights
Common stock holders enjoy preemptive rights in the company. Whenever the company offers newer classes of shares, they first offer the new shares to the common stockholders in proportion to their existing ownership in the company. The stockholders have the right to be offered these shares but are no way obligated to buy them. If they decline the shares, they are then offered to other investors. Preferred stockholders do not have preemptive rights.
Types
Common and preferred stocks have several further classifications. Commonly issued common stock include growth shares, income shares and blue chip shares. Commonly issued preferred stock include participating preferred stocks, cumulative preferred stocks and fixed rate stocks.
Fluctuations in Stock Price
Common stocks are highly volatile in nature. Their prices and the dividends received vary with changes in the external markets, the company's standing and the performance of their products or services. Preferred stock prices usually remain stable. The rate of dividend is fixed at the time of issue, hence the stockholder is paid the same sum whenever the company distributes dividends.
Dividends
Stockholders may be paid dividend income during a quarter that a company makes profits. The sequence of payments is that the company first pays obligations like interest payments to creditors, tax obligations, and reinvestments back into the business for expansion. The company then pays preferred stockholders before paying common stockholders. The same sequence is followed in case the company is liquidated. Creditors have legal claims on a company’s assets and stockholders can only take what remains after all financial obligations have been met.
Voting Rights
Common stockholders are owners of a company. They have voting rights in the company based on the number of stocks owned. For example, a stockholder who owns 1,000 common stocks out of the total issued 100,000 shares, owns 1 percent of the stock, and thus has 1 percent voting rights. Preferred stockholders do not have any voting rights in the company. Though they, too, are owners of stock, they have no say in the conduct of the business. Preferred stockholders have the option of converting stocks to common stocks whenever they desire.
Preemptive Rights
Common stock holders enjoy preemptive rights in the company. Whenever the company offers newer classes of shares, they first offer the new shares to the common stockholders in proportion to their existing ownership in the company. The stockholders have the right to be offered these shares but are no way obligated to buy them. If they decline the shares, they are then offered to other investors. Preferred stockholders do not have preemptive rights.
Types
Common and preferred stocks have several further classifications. Commonly issued common stock include growth shares, income shares and blue chip shares. Commonly issued preferred stock include participating preferred stocks, cumulative preferred stocks and fixed rate stocks.
Fluctuations in Stock Price
Common stocks are highly volatile in nature. Their prices and the dividends received vary with changes in the external markets, the company's standing and the performance of their products or services. Preferred stock prices usually remain stable. The rate of dividend is fixed at the time of issue, hence the stockholder is paid the same sum whenever the company distributes dividends.