Common stock ownership
Common stock ownership carries three primary rights or privileges. First, there is a residual claim to income. All funds not paid out to other classes of securities automatically belong to the common stockholder; the firm may then choose to pay out these residual funds in dividends or to reinvest them for the benefit of common stockholders.
Because common stockholders are the ultimate owners of the firm, they alone have the privilege of voting. To expand the role of minority stockholders, many corporations use a system of cumulative voting, in which each stockholder has voting power equal to the number of shares owned times the number of directors to be elected. By cumulating votes for a small number of selected directors, minority stockholders are able to have representation on the board.
Common stockholders may also enjoy a first option to purchase new shares. This privilege is extended through the procedure known as a rights offering. A shareholder receives one right for each share of stock owned and may combine a certain number of rights, plus cash, to purchase a new share. While the cash or subscription price is usually somewhat below the current market price, the stockholder neither gains nor loses through the process.
A poison pill represents a rights offer made to existing shareholders of a company with the sole purpose of making it more difficult for another firm or outsiders to take over a firm against management’s wishes. Most poison pills have a trigger point tied to the percentage ownership in the company that is acquired by the potential suitor. Once the trigger point is reached, the other shareholders (the existing shareholders) have the right to buy many additional shares of company stock at low prices. This automatically increases the total number of shares outstanding and reduces the voting power of the firm wishing to acquire the company.
A hybrid, or intermediate, security, falling between debt and common stock, is preferred stock. Preferred stockholders are entitled to receive a stipulated dividend and must receive this dividend before any payment is made to common stockholders. Preferred dividends usually accumulate if they are not paid in a given year, though preferred stockholders cannot initiate bankruptcy proceedings or seek legal redress if nonpayment occurs.
Finally, common stock, preferred stock, bonds, and other securities tend to receive returns over the long run in accordance with risk, with corporate issues generally paying a higher return than government securities.