There is a lot of important terminology when referring to stock and stock transactions. Therefore, I felt that it needed its own post. Here is a breakdown of the important terms you should know in regards to stock.
Common stock is the most basic form of capital that a corporation can have. All corporations will have common stock. One unit of stock is called a share. Common shareholders have certain rights of ownership.
Preferred stock is often called a hybrid investment because it has some characteristics of stock and some characteristics of bonds. Like common shareholders, preferred shareholders have liquidation and dividend rights. Preferred shareholders actually have preferential rights over common shareholders. That means that preferred shareholders would be paid before common shareholders in both circumstances.
Unlike common shareholders, preferred shareholders typically do not get voting rights.
Preferred stock is similar to bonds because it offers a fixed dividend rate. For example, a $1000 preferred share might have a face rate of 7%. That means that for each share owned, the shareholder would get a dividend of $70. This rate is fixed as long as the preferred share is in circulation. Preferred stock can also be called, meaning that after a certain period of time, the company has the right to redeem the preferred shares. Preferred stock can be convertible, which means that the shares can be converted to common stock.
Less than 10% of companies have preferred stock. Click here for a list of companies that have preferred shares.
Treasury stock is stock that has been repurchased by the company. Treasury stock is a contra-equity account and therefore, has a debit balance. Shares of common stock lose all of the rights the shares would traditionally have once they have been repurchased by the company. Treasury shares can serve a number of purposes. Companies will repurchase shares to use for stock options, bonuses, or employee programs (retirement matching or employee stock purchase plans). Companies will also repurchase shares to help strengthen the remaining shares on the market.
Authorized shares are the total number of shares the company is allowed to sell. The number of shares authorized is designated in the corporate charter (organizational document). Companies must be sure to authorize enough shares to allow for growth in the company because in most states, it is rather difficult to change the corporate charter.
Issued shares are the shares the company has elected to sell. This number cannot be greater than the number of shares authorized.
Outstanding shares are the shares that have been issued that are currently not owned by the company as treasury stock. These shares are the shares that are owned by the general public. Outstanding shares include all parties that are not the company, including current and former employees. Only company owned shares are excluded from this total.
Kristin is a Certified Public Accountant with 15 years of experience working with small business owners in all aspects of business building. In 2006, she obtained her MS in Accounting and Taxation and was diagnosed with Hodgkin's Lymphoma two months later. Instead of focusing on the fear and anger, she started her accounting and consulting firm. In the last 10 years, she has worked with clients all over the country and now sees her diagnosis as an opportunity that opened doors to a fulfilling life. Kristin is also the creator of Accounting In Focus, a website for students taking accounting courses. Since 2014, she has helped over one million students succeed in their accounting classes.
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