When a company was founded, the only shareholders were co-founders and early investors. For example, if a startup has two founders and one investor, each company may own one-third of the company’s shares. As the company grows and needs more money to expand, it may issue more shares to other investors, so the original founders may eventually fall sharper than the stocks they started with. At this stage, the company and its shares are considered private. In most cases, private stocks are not easily exchanged and the number of shareholders is usually small.
However, as the company continued to grow, early investors rushed to sell stocks and monetized the profits of early investments. At the same time, the company itself may need more investment than a few private investors can offer. At this point, the company considered an initial public offering (IPO) to transform it from a private company to a public company. In addition to private/public distinctions, companies can issue two types of stocks: common stock and preferred stock.
When people talk about stocks, they usually refer to common stock. In fact, the vast majority of stocks are issued in this form. Ordinary shares represent profits (dividends) claims and are granted voting rights. Investors usually receive one vote per share to elect a board member who oversees major decisions made by management.
In the long run, common stocks tend to receive higher returns than corporate bonds through capital growth. However, this higher return comes at a price, as common stocks are subject to the greatest risks, including the possibility of losing the entire investment amount if the company goes bankrupt. If the company goes bankrupt and liquidates, the common stockholder will not receive payment until the creditor, bondholder and preferred stockholders get paid.
Preferred stocks are similar in function to bonds and usually do not have voting rights (this may vary from company to company, but in many cases, preferred stockholders do not have any voting rights). Through preferred stock, investors usually receive a fixed fixed dividend. This is different from common stock, which has a variable dividend, which is announced by the board of directors and has never been guaranteed. In fact, many companies simply do not pay dividends on common stock.
Another advantage is that, at the time of liquidation, preferred stockholders are repaid in front of the common shareholders (but still after the debt holders and other creditors). Preferred stock can also be “redeemable”, which means that the company can choose to repurchase shares from preferred stockholders at any time for any reason (usually a premium). The intuitive way to think about these stocks is to think of them as some degree between bonds and common stock.
Common and preferred are two main forms of inventory; however, companies can also customize different types of inventory to meet investor needs. The most common reason for creating stock classes is that companies keep voting rights in a certain group. Therefore, different types of stocks are given different voting rights. For example, one type of stock will be held by the selection group, each group may receive 10 votes, and the second category will be issued to most investors with only one vote per share. When there are multiple categories of stocks, these categories are traditionally designated as Class A and Class B, and so on. For example, the Berkshire Hathaway company of the billionaire Warren Buffett company has two types of stocks, which represent the letter behind the stock code. A form like this: “BRKa, BRKb” or “BRK.A, BRK.B”.