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Types of Securities and your rights as a Shareholder

Share

Securities issued by any company are classified in to three main classes: Bonds,
Preferred Stock and Common Stock. We can understand the priority of each type of
stock by considering what happens when the company goes bankrupt.

Usually when we talk of stock we talk about common stock only. As a common
shareholder you receive the lowest priority when a company goes bankrupt. During
insolvency proceedings, it is the creditors who first get dibs on the company's assets to
settle their outstanding debts, then the bondholders get first crack at those leftovers,
followed by preferred shareholders and finally the common shareholders.

Now let’s define Bond, Preferred Stock and Common Stock.

Bond

A bond is a debt investment in which an investor loans money to an entity (corporate or


governmental) that borrows the funds for a defined period of time at a fixed interest rate.
Bonds are used by companies, municipalities, states and foreign governments to finance
a variety of projects and activities.

Preferred Stock

A class of ownership in a corporation that has a higher claim on the assets and earnings
than common stock. Preferred stock generally has a dividend that must be paid out
before dividends to common stockholders and the shares usually do not have voting
rights.

The precise details as to the structure of preferred stock are specific to each corporation.
However, the best way to think of preferred stock is as a financial instrument that has
characteristics of both debt (fixed dividends) and equity (potential appreciation). Also
known as "preferred shares".

Common Stock
A security that represents ownership in a corporation. Holders of common stock exercise
control by electing a board of directors and voting on corporate policy. In the event of
liquidation, common shareholders have rights to a company's assets only after
bondholders, preferred shareholders and other debt holders have been paid in full.

Now let’s discuss your rights as a common shareholder.

Voting power

This includes electing directors and proposals when fundamental changes like mergers
and acquisitions or liquidation takes place. Voting takes place at company’s annual
meeting.

Increased share value

As common shareholders have claim on a portion of assets of the company and they are
owners of that portion and as these assets generate profit they can reinvest in additional
assets. Thus, getting returns in the form of increased share value.

Right to transfer ownership

Right to transfer ownership means that the shareholders can trade the stock on an
exchange.

Claim on dividends

This means claim on profits a company pays. A company has two options with profits:
either to reinvest back into the firm or pay out in the form of dividends. Although the
percentage to be given is decided by the board of directors but as a common
shareholder you are entitled to receive it.

To conclude this I would like to say that shareholder privileges and rights vary from state
to state and country to country, so it is important to check with your local authorities and
public watchdogs.

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