FINANCIAL PRINCIPLES AND MANAGMENT (A publicly held company has common and prefe
ID: 2739303 • Letter: F
Question
FINANCIAL PRINCIPLES AND MANAGMENT
(A publicly held company has common and preferred stock that is held by many investors and is actively traded.)
Discuss the questions/statements below:
What is the difference between common stock and preferred stock? What are some of the characteristics of each type of stock?
FINANCIAL PRINCIPLES AND MANAGMENT
(A publicly held company has common and preferred stock that is held by many investors and is actively traded.)
Discuss the questions/statements below:
What is the difference between common stock and preferred stock? What are some of the characteristics of each type of stock?
What is classified stock? When “going public, why might a small company designate some stock currently outstanding as “founders’ shares”?.
Explanation / Answer
1) Common stock has no guarantees or preferences attached to it either for payment of dividends or for distribution of assets upon dissolution of the company. They have the last priority and hence, constitute the residual security possessing greater risk of loss and the greater potential for gain. But, they generally have the right to control the management of the company. Common stock have right of voting and entitle holders to vote on issues like electing the board of directors or other issues put to a vote in the meeting of the shareholders.
On the other hand preferred stock usually has preference to dividends in the form of a fixed dividend rate and a preference over common stock to remaining corporate assets in the event of liquidation. But they do not give the holder the right to control the management of the company.
Characteristics of Common Stock:
Characteristics of Preferred Stock:
2) Classified stock refers to the separation of company’s equity into more than one class of common shares, usually called "Class A" and "Class B." The specific features of each class are set out in the charter/bylaws. In general Class A shares have higher rights.
Founders' shares are shares originally held by the founders of a company. They are shares of normally given for consideration to the organizers or original subscribers of a corporation. They may sometimes carry special voting privileges, but receive dividends after other classes of stock.
When going public, a small company may designate some stock currently outstanding as “founders’ shares”, as it will highlight the investment made by the founders thereby instilling confidence in the public.
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