The
conceptual structure of a corporation is that shareholders elect directors, who
in turn elect the management. Shareholders control the corporation through the
right to elect the directors.
Companies
offer two types of stock: common and preferred. For investors each offer
advantages and disadvantages. Common stock represents ownership of a company.
Preferred stock guarantees dividends but with no voting rights.
Profits
distributed to shareholders are made through dividends which are paid from the
company’s earnings. Dividends for preferred stock are higher that common stock.
A preferred dividend is not like interest on a bond. The board of directors may
at any time decide not to pay the preferred dividends, and having nothing to do
with the net income of the company.
Dividends
on preferred stock are either cumulative or noncumulative. If they are
cumulative and for some reason they are not paid in a particular year, they are
carried forward as arrearage. Preferred dividends are paid before common
shareholders.
Unpaid
preferred dividends are not debts of the company. A company with preferred
stock will not default if it suspends dividend payments. In the case of
bankruptcy shareholders with preferred stock rank above common stockholders.
Preferred
stock carry credit ratings much like that of bonds. Preferred stock is
sometimes convertible into common stock, and preferred stocks are often
callable.
