When you buy stock in a company, you own a part of that company. Your ownership may or may not come with voting rights, priority in receiving dividends and the ability to get your money back in case of company bankruptcy. Your status as a shareholder depends on the types of shares you hold and the type of investor you are.
Shareholders who own common stock have the right to vote to elect the board of directors. These shareholders also may vote on matters such as stock splits and company goals. Common stock shareholders are entitled to dividends when the company declares them, although those dividends may fluctuate. However, holders of common stock are second in line behind preferred stock holders if the company goes bankrupt. In other words, common stock holders only get their money back when and if preferred stock holders are paid.
Preferred stock holders can't vote on company matters, but they receive a steady dividend that does not fluctuate and get their dividend payments before common stock shareholders do. In the event of bankruptcy, preferred shareholders get paid before holders of common stock. The company does not have to pay any dividend if it can't afford to, but if it pays a partial dividend, preferred shareholders may be paid when common stock shareholders are not.
Institutional shareholders buy large quantities of shares. Mutual funds, hedge funds and pension funds, for example, invest millions of dollars at a time and will buy either common or preferred stock. Institutional investors have the ability to move the market. A sale of millions of shares in a stock gets the market's attention and could drive the stock price down if investors perceive that the institution has doubts about the stock. Similarly, if an institutional investor buys millions of shares, prices can go up because investors assume the institution has analysts that know something good about the stock. For these reasons, institutional investors receive different treatment from individual investors. They may be invited to tour company premises, meet executives and preview new products, whether they own common shares or preferred stock.
Individual investors, also called retail investors, do not move markets. Selling a few hundred or a few thousand shares does not draw attention, just as buying shares doesn't send any signals. Retail investors spend a lot of time trying to guess what institutional investors are going to do next. For example, some individuals follow the purchases of mutual funds to anticipate increased demand for a stock. Such individuals may sell a stock if they see an institutional investor selling. Individuals may purchase either common or preferred shares, as there is no minimum purchase amount of either class of shares.
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