The capital stock of a corporation constitutes the equity stake of the corporation’s owners. The stock is partitioned into shares. When you buy one or more shares in a stock company, you become a shareholder – one of the owners of the company. In many cases, this means that you have a right to attend shareholder meetings, vote in shareholder voting sessions, and receive dividends if such payments are made.
Investing in shares is very popular. Some investors focus only on picking shares that they predict will increase in market value, while others also have an eye out for dividend paying shares.
A company can pay out some of its assets to its shareholders in the form of dividends. Dividends are usually cash, but can be anything of value, including shares. All company shares within the same class must be treated equally and receive the same.
It is the board of directors that suggests the dividend payment, but it must be approved by the shareholders to take place.
What is DRIP?
If you sign up for a Dividend Re-Investment Program (DRIP), the dividends paid out on your shares in the company will automatically be used to buy new shares in the same company for you.
Before you purchase shares, it is important to check which class they belong to, because a company can issue shares in different classes. One class may, for instance, come with extra voting rights, which can make such shares more sought after among investors who wish to gain influence at the shareholder meetings. It is also permitted for a company to pay dividends to shares belonging to one class and not to another.
Here are a few examples of different type of shares:
- Shares of common stock
The is the standard type of share, and many companies never issue anything else than shares of common stock. In most (but not all) jurisdictions, shares of common stock must give the shareholder voting rights and the right to attend shareholder meetings.
- Shares of preferred stock
Owning shares of preferred stock will not give you any voting rights, but you will have preferential treatment when it comes to dividend payments. If the company wishes to pay out dividends, the holders of shares of preferred stock must be paid first. It is also permissible for the company to only pay dividends to holders of shares of preferred stock.
Another notable difference between perferred shares and other shares is that the former are given preferential treatment over other shares if the corporation goes into liquidation. If there is something of value to divide out to the shareholders after other obligations have been honored, the holders of preferred shares have a greater right to get paid.
- Convertible shares of preferred stock
These are shares of preferred stock where the owner has a right, but no obligation, to convert the preferred shares into a fixed number of shares of common stock.
When a company issues convertible shares of preferred stock, they are typically not convertible right away. Instead, they will become convertible after a specific pre-determined date.