Basic Concepts Of Common And Preferred Stocks

Stocks, which represent ownership in a corporation are, and have been, one of the best investments one can make. The potential for profit is much greater than with guaranteed investments or interest-paying investments.

The main benefits of corporations over sole proprietorships and partnerships are that:

• its owners—stockholders—are liable only for the amount invested;

• the corporation can raise large amounts of money through the sale of stocks and bonds;

• complete control is vested in a board of directors, which the stockholders choose through voting.

The main disadvantage is that a corporation is carefully regulated by law, and must publish and distribute numerous reports to stockholders and various government agencies.

Corporations are business entities that operate under a charter from a state and raise capital by selling stocks and bonds, a form of capitalization.

Stocks are equity capital, giving the owners of stock a part ownership in the corporation, and bonds are debt capital. Bond holders lend money to the corporation by buying their bonds.

Total capitalization is the sum of equity and debt capitalization.

The net worth or shareholders’ equity is the difference between total assets and total liabilities of the corporation.

Legal Rights Of Common Stockholders

Common stockholders have the following legal rights:

• The right to receive stock certificates as evidence of ownership.

• The right to vote at stockholders’ meetings.

• The right to receive any declared dividends, and to sell the stock.

• The right to information and to receive financial reports about the company.

• Sometimes they may have the right to buy newly issued shares of stock by the company before the shares are sold to the public, so that current owners can maintain their proportionate interest in the company, if they so choose. Whether they have this privilege is determined by law or by the company's charter.