Principles Of Finance: Types Of Stock

Principles of Finance Name Institution Affiliation Principles of Finance Stock is a term used to designate securities that carry the ownership interests and reflect a potential claim on business assets and profits generated by a company (Walther, 2014). Stock is classified into two main categories, which include preferred stock and common stock. Preferred stock implies preferential rights concerning dividend payments as well as the repayment of capital, whereas common stock refers to the ordinary stock offered by the company. Despite having some similarities, these types of stock are different forms of equity (Walther, 2014). The major difference between preferred stock and common stock is that in the former, the stockholders have no voting rights, meaning that they cannot participate in any election such as the selection of the board of directors. On the other hand, common shareholders have voting rights where each share represents a single vote. Typically, common stockholders tend to outperform preferred shares and bonds (Walther, 2014). When it comes to liquidation, preferred stockholders have a greater claim to a firm's earnings and assets. When the company has generated excess profits, it distributes the money to investors through dividends, which are higher than those offered for common stockholders (Cremades, 2018). The value of dividends for comm...