What Is Financial Capitalization?
The capitalization of a public corporation consists of four main elements -- common stock, preferred stock, retained earnings and long-term debt. Two categories of stockholders -- common and preferred -- entrust funds to the corporation in the hope of participating in its growth and success. Management reinvests a portion of earnings instead of paying all out in the form of dividends. Long-term debt figures into management's strategic planning.
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Common Stock
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Most stock market investors are buying and selling common stock in public companies that are listed on major stock exchanges. Holders of common stock have voting rights -- one vote per share -- in the corporation's system of governance. If the corporation is ever liquidated, or closed down due to insolvency, common stockholders are last in line for recovery of invested funds. Common stockholders sometimes receive dividends on their shares, but they invest for capital appreciation, as speculators, hoping that the corporation will continue to succeed.
Preferred Stock
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Like common stock, preferred stock represents ownership in a public corporation. The difference is that the preferred stockholder is ahead of the common stockholder in terms of claims, earnings and assets in the event of liquidation. Most preferred shares carry a fixed dividend, which must be paid before payment of any common dividend. Preferred shares normally carry no voting rights. This class of investor is usually looking for a normal return on his investment and plans to hold the stock for a long time.
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Retained Earnings
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These are earnings of the corporation that are held back for reinvestment in corporate operations or to pay off debt. This portion of earnings is not paid out as dividends. Net income that is accumulated in this category can be used for acquisitions of other income-earning assets.
Long-Term Debt
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This category of capitalization consists of bonds, loans and any other debt that matures at least one year in the future. Management uses this money for capital outlays -- for buying basic major items of equipment and manufacturing or other corporate facilities. A corporation with a conservative financial policy has little or no long-term debt.
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References
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