Different Types & Class of Common Stocks

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Corporations issue stock in different classes and types for a variety of reasons. Stocks have various benefits to the shareholders in different classes. For instance, one class might have a higher number of votes per share or might receive preferential treatment in some other manner. If you purchase stock of a company, it's important to know the rights you receive when you buy the stock.

Types of Issuing Entities

C corporations have the option of offering different classes of stock according to their articles of incorporation. A C corporation is a full corporation that pays taxes on profit and deducts the salaries paid to employees, including owners. They in turn pay taxes. S corporations, however, pass through all income and it becomes directly taxable to the owners. S corporations have only one type of stock.

Dividends

One reason for differentiating stock classes is for dividends. Preferred classes of stock may have the option of receiving fixed dividends before other classes of stock. It's often a cheaper method for corporations to raise money rather than floating a bond issue. If there's a year with no profits, but a profitable year following, the preferred class receives the previous year's dividends before common stock receives any money. If interest rates drop and the company wishes to retrieve your shares, the preferred stock is callable. The company can buy it back at any time. You'll get your money back but won't reap the higher return.

Voting Rights

Common stock normally has voting rights but preferred stock doesn't. However, corporations may also issue class A and B common stock shares. Depending on how the charter reads, one of these share classes may have more votes. The company founders hold these shares to maintain control of the corporation.

Treasury Stock

Treasury stock is common stock repurchased by the company. It often occurs when the company has more liquidity and it believes the price of the shares is low enough to be a bargain. The company might sell the shares or retire the shares, which gives stockholders a larger portion of equity per share. Some states don't allow companies to hold treasury stock.

Unissued Stock

This stock remains in the coffers of the company for later use. The company may keep the supply of stock on the market smaller and issue the stock later as the demand and price rise. This brings more income into the company coffers. The company also may have a schedule of issue times, also in the hope of enticing more interest in the purchase of the shares.

Guaranteed Stock

Sometimes corporations have affiliations with one another. In the case of guaranteed stock, one corporation, often stronger, guarantees the dividends of the company issuing guaranteed stock second. They do this in an effort to help boost the price of the stock.

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