An Overview of Dividends Shares and Preferred Stock

Dividends, shares, and preferred stock all refer to concepts in stock investments. Shares and preferred stocks both refer to forms of equity, or ownership, in a corporation. Dividends are payments which may be regularly made by corporations to its shareholders, or to only a specific group of shareholders, like owners of preferred stock.

A share is, in investment terms, the ownership of a percentage of a corporation. In simple terms, a company’s ownership might be divided into 100 portions, each of which is known as a “share.” These could be distributed to 100 shareholders, but one individual (or another corporation) can hold multiple shares. For instance, one individual could own 10 shares in this corporation, which would equate to a 10 percent stake in the company. According to Julia Lee of Mount Holyoke College, the most common type of share is what is called “common stock.” For large corporations, common stock is frequently (but not necessarily) traded on a stock exchange, and the trading value on the exchange determines the shifting value of each share from day to day.

The precise rights and responsibilities of common stock owners will vary by jurisdiction. In general, however, shares which take the form of common stock have three main characteristics. First, they carry limited liability, which means that the maximum amount the shareholder can lose in the event of bankruptcy or other problems with the company is limited to the total value of their shares. Second, all common stock owners have the right to vote on motions presented at the corporation’s annual general meeting, with their votes weighted according to the number of shares they own. Third, common stock owners are generally the last to receive a payout in the event that the company goes bankrupt or is dissolved, after creditors and bondholders.

Not all types of shares are common stock, however. According to Lee, corporations may also choose to sell shares with additional privileges over and above those of common stock. These shares are referred to as “preferred stock.” The value of preferred stock depends upon what additional privileges are granted, but typically reflects the terms on which it can be converted into common stock and sold, as well as any dividends which it guarantees to pay out. Preferred stock may promise additional dividends in the event of strong corporate performance, a fixed rate at which it can be converted into common stock, and a higher priority position in the event that dividends or payouts can only be made to a limited number of shareholders, leaving some owners with nothing.

The principal means by which a corporation pays out money to share holders is known as the dividend. In most cases, owners of common stock will expect to experience the greatest gains in wealth from increases in the value of their shares on the stock exchange. However, corporations may also choose to pay out a fixed amount of money to each shareholder, per share. (For instance, a corporation could choose to pay $10 per share in cash to each share holder.) Dividends may be paid out annually, quarterly, or on any other basis determined by the corporation. They may also be given as a one-time-only payment. Depending upon the terms decided upon, dividends may also take the form of additional shares or other assets, rather than cash, although dividends are normally paid in cash. Dividends may also be paid only to owners of certain classes of preferred stock, while common stock owners receive no dividend or a different dividend.