Common and Preferred Stock

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Common and Preferred Stock

How do Corporations raise capital? All of the large corporations could not have grown to their present size without being able to find innovative ways to raise capital to finance ultimate expansion. There are many ways this can be accomplished, but this review will take a look at just two ways: the issuance of Preferred Stock and selling of Common Stock.

What exactly is a stock, anyway? Basically, stock is ownership, simple as that. Buy a share of APPLE Inc. and acquire a tiny sliver of the computer giant, tying the investments fate to that of the Chairman, for better or worse. This is ownership in the most literal sense: You get a piece of every desk, contract and trademark in the place. You own a slice of every dollar of profit that comes through the door. The more shares you buy, the bigger your stake becomes. Just how much ownership, ultimately, depends on the number of shares owned and how many shares of stock the company has overall. Both preferred and common stock, or “equity instrument”, carry an ownership interest but may entitle the holder to different rights and privileges and carry no specific right to a return on capital.

While common and preferred stock have many general traits, it is important to understand that companies can usually write their own rules for each type of stock. The company's controlling documents, such as the articles of incorporation or the corporate bylaws, may lay out both rights and obligations for each type of stock the company offers. Companies have a lot of choice in how they set their stock up, so the general rules about common and preferred stock do not always apply to each individual company. Common stock is the most basic form of ownership interest. It represents an ownership interest in a corporation, including an interest in earnings, that realize declared dividends, as well as an interest in assets distributed upon dissolution. This type of...
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