The rights and benefits of a stockholder vary according to the type of stock held. There are two main categories of stock, common and preferred.
A Common Stock
Financial loss or gain can be greater with common stock than with preferred stock. Holders of common stock have residual equity in a corporation. This means they have the last claim on the earnings and assets of a company, and they may receive dividends only at the discretion of the company’s board of directors and after all other claims on profits have been satisfied. For example, if the company is dissolved, stockholders share in what is left only after all other claims have been settled. Because dividends and equity do not have fixed dollar values, holders of common stock can reap greater benefits when a company is prosperous or lose more when a company is doing poorly than holders of preferred stocks.
B Preferred Stock
Holders of preferred stock take precedence over holders of common stock. Preferred stock shareholders are usually entitled to receive a fixed dividend before any payments are made to common stockholders. Holders of preferred stock typically receive a share of the proceeds from the dissolution of a company before holders of nonpreferred stock. Some stocks have both preferred dividends and preferred assets. Stock with first preference in the distribution of dividends or assets is called first preferred or, sometimes, preferred A; the next is called second preferred or preferred B, and so on.
Although holders of preferred stock may have to forego a dividend during a period of little or no profit, this is not true for two types of preferred stock. One is cumulative preferred stock, which entitles the owner to cumulative past-due and unpaid dividends. Another type is protected preferred stock, which the corporation issues after paying the preferred-stock dividends and placing a specified portion of its earnings into a reserve, or sinking, fund in order to guarantee payment of preferred-stock dividends.
Two other categories of preferred stock are redeemable stock and convertible stock. Redeemable stock is issued with the stipulation that the corporation has the right to repurchase it. Convertible stock provides the stockholder with the option of exchanging preferred stock for common stock under specific conditions, such as when the common stock reaches a certain price or when the preferred stock has been held for a particular time.
C Voting, Nonvoting, and Vetoing Stock
Although most stockholders have the right to vote at their meetings, thus participating in corporate management, some stocks specifically prohibit this. Such nonvoting stock may be common or preferred stock. However, at least one kind of stock issued by a corporation must be endowed with the voting privilege. This type of stock is called voting stock, and it may not be changed to nonvoting stock without the stockholder’s consent. Another type of stock is vetoing stock. Holders of vetoing stock may vote only on specific questions. Voting at stockholder meetings can be done by proxy—that is, a stockholder who will not be present at the meeting can authorize someone who will be at the meeting to cast their vote. Each share of stock is worth one vote. Before voting by proxy was permitted, independent stockholders had a greater chance of influencing the management of a company. After voting by proxy was authorized, however, company managers and directors holding a stock minority usually obtained enough proxies from absentee stockholders to outvote any opposition, thus perpetuating their control.
While stockholder voting is typically limited to the determination of the company’s board of directors and other specific corporate matters, there are instances where social concerns lead stockholders to force a change in business operations. For example, during the 1970s and 1980s the stockholders of a number of corporations required their companies to terminate or modify their business operations with South Africa. The stockholders wanted this change because South Africa was then engaged in the practice of apartheid—a policy of segregation involving economic and political discrimination against non-Europeans.
A Common Stock
Financial loss or gain can be greater with common stock than with preferred stock. Holders of common stock have residual equity in a corporation. This means they have the last claim on the earnings and assets of a company, and they may receive dividends only at the discretion of the company’s board of directors and after all other claims on profits have been satisfied. For example, if the company is dissolved, stockholders share in what is left only after all other claims have been settled. Because dividends and equity do not have fixed dollar values, holders of common stock can reap greater benefits when a company is prosperous or lose more when a company is doing poorly than holders of preferred stocks.
B Preferred Stock
Holders of preferred stock take precedence over holders of common stock. Preferred stock shareholders are usually entitled to receive a fixed dividend before any payments are made to common stockholders. Holders of preferred stock typically receive a share of the proceeds from the dissolution of a company before holders of nonpreferred stock. Some stocks have both preferred dividends and preferred assets. Stock with first preference in the distribution of dividends or assets is called first preferred or, sometimes, preferred A; the next is called second preferred or preferred B, and so on.
Although holders of preferred stock may have to forego a dividend during a period of little or no profit, this is not true for two types of preferred stock. One is cumulative preferred stock, which entitles the owner to cumulative past-due and unpaid dividends. Another type is protected preferred stock, which the corporation issues after paying the preferred-stock dividends and placing a specified portion of its earnings into a reserve, or sinking, fund in order to guarantee payment of preferred-stock dividends.
Two other categories of preferred stock are redeemable stock and convertible stock. Redeemable stock is issued with the stipulation that the corporation has the right to repurchase it. Convertible stock provides the stockholder with the option of exchanging preferred stock for common stock under specific conditions, such as when the common stock reaches a certain price or when the preferred stock has been held for a particular time.
C Voting, Nonvoting, and Vetoing Stock
Although most stockholders have the right to vote at their meetings, thus participating in corporate management, some stocks specifically prohibit this. Such nonvoting stock may be common or preferred stock. However, at least one kind of stock issued by a corporation must be endowed with the voting privilege. This type of stock is called voting stock, and it may not be changed to nonvoting stock without the stockholder’s consent. Another type of stock is vetoing stock. Holders of vetoing stock may vote only on specific questions. Voting at stockholder meetings can be done by proxy—that is, a stockholder who will not be present at the meeting can authorize someone who will be at the meeting to cast their vote. Each share of stock is worth one vote. Before voting by proxy was permitted, independent stockholders had a greater chance of influencing the management of a company. After voting by proxy was authorized, however, company managers and directors holding a stock minority usually obtained enough proxies from absentee stockholders to outvote any opposition, thus perpetuating their control.
While stockholder voting is typically limited to the determination of the company’s board of directors and other specific corporate matters, there are instances where social concerns lead stockholders to force a change in business operations. For example, during the 1970s and 1980s the stockholders of a number of corporations required their companies to terminate or modify their business operations with South Africa. The stockholders wanted this change because South Africa was then engaged in the practice of apartheid—a policy of segregation involving economic and political discrimination against non-Europeans.
