Stock

Stock represents a portion of ownership in a company. Each share of stock has a certain value based on the price placed on the stock when it was originally sold to investors. This price isn’t affected by the current market value of the stock. Any increase in a stock’s value after its initial offering to the public isn’t reflected here. The market gains or losses are actually taken by the shareholders and not the company when the stock is bought and sold on the market.

Some companies issue two tpes of stock:

Common shareholders: These shareholders own a portion of the company and have a vote on issues taken to the shareholders. If the board decides to pay dividends (a certain portion per share paid to common shareholders from profits), common shareholders get their portion of those dividends as long as the preferred shareholders have been paid in full.

Preferred shareholders: These shareholders own stock that’s actually somewhere in between common stock and a bond (a long-term liability to be paid back over a number of years). Although they don’t get back the principal they paid for the stock, as a bondholder does they do have first dibs on any dividends.

Preferred shareholders are guaranteed a certain dividend each year. If, for some reason, a company doesn’t pay dividends, these dividends are accrued for future years and paid when the company has enough money. Accrued dividends for preferred shareholders must be paid before common shareholders get any money. The disadvantage for preferred shareholders is that they have no voting rights in the company.

If a company goes bankrupt, the bondholders hold first claim on any money remaining after the employees and secured debtors (debtors who have loaned money based on specific assets, such as a mortgage on a building) are paid. The preferred shareholders are next in line, and the common shareholders are at the bottom of the heap and are frequently left with valueless stock.

(These definitions came from p 89 Reading Financial Reports for Dummies)