Classification of capital stock

ADS

 Capital stock are shares issued to equity holders in return for assets and services. There are two basic types of capital stock: preferred and common. There also are a number of different variations within each of these two classes of stock. Preferred Stock. Preferred stock is a special class of stock possessing preferences or features not enjoyed by common stock. The more typical features attached to preferred stock include:

• Dividend distribution preferences including participating and cumulative features.
• Liquidation priorities especially important since the discrepancy between par and liquidation value of preferred stock can be substantial. For example, Johnson
• Controls issued preferred stock with a par value of $1 and a liquidation value of $51.20.
• Convertibility (redemption) into common stock the SEC requires separate presentation of these shares when preferred stock possesses characteristics of debt (such as redemption requirements).
• Nonvoting rights which can change with changes in items such as arrearages in dividends.
• Call provisions usually protecting preferred shareholders against premature redemption (call premiums often decrease over time).

While preferred shareholders are usually senior to common shareholders, the preferred shareholders’ rights to dividends are usually fixed. However, their dividend rights can be cumulative, meaning they are entitled to arrearages (prior years) of dividends before common shareholders receive any dividends. Among preferred stock classes, we find a variety of preferences relating to dividend and liquidation rights. These features, and the fixed nature of their dividends, often give preferred stock the appearance of liabilities. An important distinction between preferred shareholders and creditors is that preferred stockholders are typically not entitled to demand redemption of their shares. Nevertheless, some preferred stocks possess set redemption dates that can include sinking funds funds accumulated for expected repayment. Characteristics of preferred stock that would make them more akin to common stock include dividend participation rights, voting rights, and rights of conversion into common stock. Preferred stock often has a par value, but it need not be the amount at which it was originally issued.

Common Stock

Common stock is a class of stock representing ownership interest and bearing ultimate risks and rewards of company performance. Common stock represents residual interests having no preference, but reaping residual net income and absorbing net losses. Common stock can carry a par value; if not, it is usually assigned a stated value. The par value of common stock is a matter of legal and historical significance it usually is unimportant for modern financial statement analysis. There is sometimes more than one class of common stock for major companies. The distinctions between common stock classes typically are differences in dividend, voting, or other rights.

ADS