The newcomer to stock trading can often be confused about the different kinds of shares which can be held in a company. The two most important kinds of these are common stock, also known as ordinary shares, and preferred stock or preference shares.
The terms “common” or “ordinary” are used to distinguish this kind of shares from what are known as “preferred” or “preference” shares. Common stocks are also sometimes referred to as voting shares because common stock holders are usually able to have an influence on the activity of the company through voting.
The most basic difference between common stock and preferred stock is that, should the company go into bankruptcy, preferred stock holders, along with creditors and holders of bonds in the company, will be paid out before the common stock holders. In this sense, common stock is the least secure form of share in a company.
Of course there’s a flip side to everything and the flip side to the greater insecurity of common stock is that these stocks usually perform better than preferred and other forms of stock. So while stockholders will be at the end of the line for any payout should the company be wound up, they’re in the front row when the company is doing well.
Common stock holders may also be the most vulnerable to any manipulation by unscrupulous company directors. Because they have no fixed dividend, their annual return on their investment will be subject to the company’s earnings in any year and what proportion of profits will be paid as dividends, reinvested in the company or otherwise disposed of.
When a company issues additional stock to raise capital, the value of each original share may be diluted. Because of this some common stock includes what are known as pre-emptive rights. This means that, in the event of a new stock issue, the common stock holder is able to retain the same proportion of ownership.
Rights of the Common Stock Holder
Holders of common stock have the right to receive dividends, when declared by the company board, and an unlimited right to sell stocks at a profit, known as a capital gain, both on licensed stock exchanges and in private transactions, whenever a buyer is available.
Common stocks also carry the right to a proportion of any capital acquired in the case of a company merger or other major transaction. Like dividends, this must be approved by the company shareholders. They are also entitled to a share of any realization of assets in the case of the company being liquidated.
Common stock holders also have the right to vote on the election of directors and on other major decisions such as amendments to the company regulations, mergers and sales of assets.