Shares of stock represent equity or ownership in a corporation which carry with them certain guarantees such as dividends, voting, liquidation, and preemptive rights. Common stock is considered residual interest in a firm which means stock value is based on the value of a corporation that is left over after superior obligations are met. Senior obligations can include debt repayments, taxes due, etc.. Common stock is the most prevalent security traded in Capital Markets.
Preferred stock is also represents ownership in a corporation with some important differences from common stock. Preferred stockholders are guaranteed dividend payments whereas common stockholders are paid dividends based on quarterly decisions of the board of directors. Although some boards of directors pay regular quarterly dividends, they is no guarantee that they will continue in the future; there is no obligation to pay dividends to common stockholders.
Preferred stockholders are given higher priority to dividend payments and proceeds acquired through liquidation. Essentially, preferred stockholders must be paid dividends before common stockholders are paid any dividends. However, if a corporation can not pay dividends to preferred stockholders, the firm is not forced into bankruptcy. In addition, preferred stockholders usually have neither a residual claim on assets nor voting rights.
As an ongoing representation of ownership in a corporation, stocks do not mature but continue to hold value as long as the firm still exists. Prices fluctuate in the market based on the company’s current profitability and expected future cash flows.