Bonds, Preferred Stock & Common Stock
Stocks and bonds are two types of security interests that companies use to raise capital. Shares of stock represent ownership, while bonds are debt repaid with interest. There are many different types of stocks and bonds, and both are subject to both federal and state securities laws. Those with specific questions about stocks or bonds should discuss them with a legal or securities professional.
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Bonds
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A bond functions essentially like a loan. When an organization (business or government) offers a bond and an investor buys it, the investor gives money up front to the organization. The organization then pays interest on the bond, typically in regularly scheduled payments. The interest payments last for the life of the bond (some are 10 years, some are 20, etc.). At the end of the life of the bond, the organization pays the bondholder back the principal (his initial investment). This end date is known as the maturity of the bond.
Stock
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A share of stock is very different from a bond. Rather than a loan, stock is actually a portion of ownership of the company. Companies may issue millions of stock shares; the weight of the shareholder's ownership interest depends on the number of shares he owns. Shareholders may have the right to dividends, or periodically released payments that represent a share of the company's profits. There are two types of stock -- common and preferred.
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Common Stock
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Common and preferred stock entail different rights and responsibilities, and those rights and responsibilities may be different in each company. However, typically, holders of common shares have a democratic voice in the company. At annual meetings and other special meetings to decide important company issues, common shareholders generally get one vote per share of stock owned. Common shareholders vote on the composition of the company's board of directors. Common shareholders don't have the right to regular dividends, but they do have a right to receive dividends proportional to their share holdings when the company does declare dividends.
Preferred Stock
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Preferred shareholders trade their rights to make company decisions for the certain right to dividends. Typically, the preferred shareholder gets his dividend payments at regular intervals that are fixed in advance. If the company does not have enough profits to go around, the preferred shareholder gets paid first (thus the "preferred" title). However, preferred shareholders generally will not have any of the voting rights enjoyed by common shareholders, except in specialized situations; for instance, if the board of directors does not declare dividends and the preferred shareholders remain unpaid, they usually have the right to vote on the directors.
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