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What Does A Stockholder Do?

Oct 31, 2007
Let us envision you, not as a creditor, but as a part owner, a proprietor. That's what you become when you buy stock. You get away from the sheltered and static position of having a prior call on a certain sum of money and become instead a partner sharing in the risks as well as in the profits of a business.

What Is a Stockholder?

Bonds are sold when the raising of long-term money is done by borrowing. When permanent capital is sought by attracting new corporate partners, the arrangement is entirely different. The part ownership in a corporation is represented by an engraved or printed piece of paper called a stock certificate. You are frequently given a choice of ownerships. You can, in certain companies, become a limited partner by buying preferred stocks; or you can buy common stock, which is the indispensable evidence of equity ownership in every stock corporation.

The preferred stock appeals to those who are content to accept a lesser risk in return for a more certain income. If you own a preferred stock, you are a limited partner. You are entitled to dividends at a certain stated rate before any dividend is paid to common shareholders. These dividends, however, may only be paid to you if the company has earned them.

Sometimes a company will lose money in one year but continue paying preferred dividends from the accumulated profits of earlier years. Most preferred shares are cumulative, which means the company, if it skips one or more dividend payments, is obligated to make them up at a later date when and if earnings permit.

The principal feature about preferred stocks is that they give the holder this prior position in the distribution in any net profits earned. Bond interest (if a company has bonds) comes ahead of preferred dividends, but the preferred shareholders must get their full dividend at the stated rate before common stockholders receive anything.

Preferred stocks are usually given a definite par value. The most popular value is either $50 or $100, but there are many preferreds with a $5 or $10 par. The description of a preferred stock written on the certificate will usually spell out the dividend rate either as so many dollars a year or a percentage of the par amount and outline any convertible provision or any dividend participation with common stock.

Dividends are customarily paid quarterly by check to registered holders. Preferred stocks are usually callable, that is, they may be bought in and redeemed by the issuing company at a specified price, usually above par value. For example, a $100 preferred stock may have a $110 "call" price. A few preferred stocks, such as Virginia Carolina Chemical and National Biscuit, are non-callable.

Preferred stocks are the least popular of marketable securities. In general, they provide less safety of principal and certainty of income than good bonds and lack (unless convertible) any chance of sharing in the fat earnings accruing to common stocks in outstandingly profitable years. A good preferred stock will usually yield about 1percent more than bonds of the same company. The most popular preferred stocks are those of electric utility companies whose record for continuous preferred stock dividend payments has been remarkable.

About Common Stocks

Stock companies can issue bonds, preferred or common stock; but the one security they must issue is common or capital stock. This not only represents the actual ownership and equity in the business, but the common stock, voted by those who own it, determines who shall manage the company. Common stockholders elect the directors, who in turn elect the officers who actually run the company.

A common stock is a subdivision of ownership. As part owner of a business, the common stockholder shares in the corporate fortune. In good times he gets dividends; in bad times, headaches. And his security, the common stock certificate, may fluctuate widely in market value in reflection of the various changes in corporate welfare. It is in being a common stockholder that you get the big kick out of investing.

Now you know a bit about it, you may wish to become a stockholder.
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