Classes of Common Stock

• Most of the stock a corporation issues is referred to as common stock. Common stock has voting rights. The common stock shareholders elect the board of directors, who are responsible for the corporation's operations, and they may also be asked to vote on certain policies and other important company matters.
  
  A C corporation can issue more than one class of common stock. For example, if the founders of the company want to ensure that they retain control of the company, they might issue class A stock to the founders, authorizing 10 votes per share of class A stock. They could then issue class B common stock to all subsequent investors, authorizing one vote per share for each of these shares. The founders could limit the number of class B stock they offer for sale to maintain control of the company.
  
  

Preferred Stock

• Some corporations also issue preferred stock, which is often more expensive than common stock shares. It is called preferred stock because it entitles shareholders to preferential treatment over common stockholders. A corporation can create any number of restrictions or privileges with preferred stock. It can issue these shares with no voting rights, allowing the corporation to raise investment money without diluting voting control. It can also issue preferred shares with more voting rights than common stock to attract larger investors or to attract initial investors when the corporation is first formed. Some preferred stock includes the right of convertibility. This gives shareholders the right to convert their preferred shares to common shares, if this is to their advantage.
  
  

Dividends

• When a corporation declares dividends, it is paying out a share of the company's profits to its shareholders. The share of the profit each shareholder receives is determined by the class of stock and the number of shares a shareholder owns. Dividends represent an important additional return on the investment in a corporation, and add to the value of owning stock.
  
  

Liquidating a Corporation

• If a corporation closes, the order in which investors get paid also depends on which class of stock they own. In a failing corporation, for example, creditors -- those to whom the corporation owes money -- get paid first. Preferred stockholders come next; since their stock came at a higher cost than common stock, they receive preferential treatment. If anything is left after these two groups are paid, common stockholders split the remaining funds according to the number of shares they own.