The financial markets offer several ways to invest in public companies. When you research stock offerings, you may find that one of the larger companies offers both common ("equity") and preferred (or "preference") shares. These are two breeds of company stock that carry different terms and restrictions. The payment of dividends varies with common and preferred shares, and in the case of a company liquidation, the two classes of shareholders may experience quite different outcomes.
Equity and preference, or preferred, shares are different classes of stock, but investors can usually buy and sell both varieties on the public markets through a brokerage account. Some companies do restrict their preference shares to a limited number of stakeholders, however. The company issues the shares to raise start-up capital; the shares can be privately traded or transferred and may not be available to the general public.
Preferred shares rise and fall in market price according to supply and demand, but also act like bonds in carrying a fixed dividend rate (also known as the "coupon rate"). When issuing preference shares, the company makes a commitment to pay this dividend, usually quarterly or bi-annually, regardless of its financial results or long-term outlook. With equity shares, the company announces the payment of dividends each quarter, and has the option to initiate, suspend, cut or raise the dividend rate according to its financial condition.
Voting and Other Rights
Equity shares carry voting rights, while preference shares do not. These rights allow common stock shareholders to vote for board members, on proposed mergers, or on the sale of the company to another firm or individual. With preference shares, the company may claim the right to "call" the shares or buy them back from investors; preference shareholders may have the right to convert the shares to common stock at a fixed price.
If a company needs to wind up its business and liquidate its assets in bankruptcy, then the courts will schedule the repayment of the company's investors. First in line, customarily, are bondholders and other creditors who have made secured loans to the company. Next are preference shareholders, and last in line are the holders of common stock. In most cases, the stock of a bankrupt company is cancelled altogether, leaving investors of equity shares with a total loss of their stake.
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