- The difference between common and preferred stock
Common stock, also called ordinary stock, are part of equity stock, which earn variable dividends. The amount of dividend they receive depends on the company’s performance and the decision of the board of directors. Thus, the dividend varies from annually and in some years, they may not receive dividends. Furthermore, common stock has residual claim on dividends after preferred stock have been paid. Common stock have an ownership stake in the company, accompanied by voting rights either in person or by proxy. They can, therefore, participate in some aspects of decision-making such as board membership, stock splits or issuance of convertible securities (Person Highered.com, n.d.). Common stock holders can easily transfer their securities to others without the need to seek permission from the company. The market value of common stock varies with performance of shares in the market. Hence, common stock have higher growth potential than preferred stock since the more successful the company becomes, the higher the market value of the shares. Lastly, the par value of common stock is, normally, very low, mostly $1. This low value enables the company to reduce it taxation costs since states normally tax companies based on the value of their common stock.
Preferred stock are part of equity that earn fixed dividend. The dividend rate is specified as a percentage of the par value of preferred stock. Thus, the dividends varies with interest rate changes. Preferred stock has a prior claim to dividends and cash flows upon the liquidation of the company. They are paid dividends before common stock, but after bond holders. In addition, they have no voting rights, thus, do not participate in decision making. Preferred stock are mostly held by institutional investors seeking additional sources of revenue.
- Par value stock, stated value stock and no par
Par value stock are those whose price is stipulated by the law upon incorporation of a public limited company. Par value is, therefore, the price of stock that generates the minimum amount of legal capital that acts as a buffer in case the company becomes bankrupt (Spaulding, 2014). It is usually set below the market price because companies cannot issue subsequent stock at a price below the par value. No-par stock are those that do not have a par value printed on their stock certificates. Stated value stock are no-par stocks whose value is determined by a company’s board of directors on incorporation rather than the law. Stated value serves the same purpose as the par value.
- Paid-in capital
Paid-in capital is also called contributed capital. It is part of equity capital that the company receives from public subscription of its issued shares (Averkamp, 2014). When a company issues shares for subscription, members of the public may buy a significant portion and some may be remain unsubscribes. Thus, only the shares for which capital is received qualify under paid-in capital.
- Two types of dividends
Cash dividend is a dividend payment effected in cash. After the board of directors declares the amount of dividends, it remits them to equity holders in the form of cash. It is the most common type of dividend.
Scrip dividend is a promissory note that a company issues to equity holders when its funds are insufficient to pay cash dividends (Accounting Tools, 2014). The note stipulates dividend payment at a later future date when funds become available.
References
Accounting Tools. (2014). Types of Dividends. Retrieved on 31 Oct, 2013 from http://www.accountingtools.com/types-of-dividends
Averkamp, Harold. (2014). Stockholders’ Equity. Retrieved on 31 Oct, 2014 from http://www.accountingcoach.com/stockholders-equity/explanation/3
Person Highered.com. n.d. Equity in the Securities Market. Retrieved on 31 Oct, 2014 from http://www.pearsonhighered.com/assets/hip/us/hip_us_pearsonhighered/samplechapter/0789732874.pdf
Spaulding, William C. (2014). Why do Stocks have Par Value or Stated Value, and Why is This Less than the Market Price? Retrieved on 31 Oct, 2014 fromhttp://thismatter.com/money/stocks/legal-capital.htm
