Read the following text, paying particular attention to the highlighted words.
Common and Preferred Stock
The rights and benefits of a stockholder vary according to the type of stock held.
The two main stock categories are called common and preferred. Financial loss or gain can be greater with common stock than with preferred stock. Holders of common stock have residual equity in a corporation; that is, they have the last claim on the earnings and assets of a company, and may receive dividends only at the discretion of the company's board of directors and after all other claims on profits have been satisfied. For example, if the company is dissolved, stockholders share in what is left only after all other claims have been settled. Dividends and equity conferred by common stocks have no fixed dollar value; holders of such stock, therefore, benefit more from a company's prosperity or lose more from a company's adversity than do holders of preferred stocks.
If a stock has preferred dividends, the owner is entitled to receive a fixed dividend rate before any dividends are distributed to other stockholders; if a stock has preferred assets, the stockholder receives a share of the proceeds from the dissolution of a company before holders of nonpreferred stock do. Some stocks have both preferred dividends and preferred assets. Stock with first preference in the distribution of dividends or assets is called first preferred or sometimes preferred A, the next is called second preferred or preferred B, and so on.
Although holders of preferred stock may have to forego a dividend during a period of little or no profit, this is not true for two types of preferred stock. One is cumulative preferred stock, which entitles the owner to cumulation of past-due and unpaid dividends; the other is protected preferred. When the latter is issued, the corporation, after paying the preferred-stock dividends, places a specified portion of its earnings into a reserve, or sinking, fund in order to guarantee payment of preferred-stock dividends.
Two other stock categories are redeemable stock and convertible stock. The former is preferred stock issued with the stipulation that the corporation has the right to repurchase it. The latter stock endows the stockholder with the option of exchanging preferred stock for common stock under specific conditions, such as when the common stock reaches a certain price, or when the preferred stock has been held for a particular time.
Although most stockholders have the right to vote at their meetings, thus participating in corporate management, some stocks specifically prohibit this. Although such nonvoting stocks may be among any of those previously mentioned, at least one kind of stock issued by a corporation must be endowed with the voting privilege. Voting stock may not be changed to nonvoting stock without the stockholder's consent. So-called vetoing stock is between voting and nonvoting stock; its holders may vote only on specific questions. Before voting by proxy was permitted, independent stockholders influenced the management of a company. After it was authorized, however, company managers and directors holding a stock minority obtained enough proxies from absentee stockholders to outvote any opposition, thus perpetuating their control.
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