When a company is created, the only stockholders are the co-incorporators and first investor. For instance, if a startup company has two founding members and one provider of capital, each of them may possess one-third of the company’s equities.
As the business develops and needs more funds to extend, it may bring into circulation more of its equities to other investors, so that the primary establishers may end up with a significantly lower percentage of stocks than they began with. During this period, the firm and its equities are considered individual. In general, private stocks are not easily exchanged, and as usual there are not too many stockholders.
As the business becomes larger, however, there often comes a moment when early fund clients begin to examine the sale of their equities to monetize the incomes of their primary financial placements. Additionally, the business itself may need more investment spending than the limited number of early investors can suggest. At this moment, the company thinks over an initial public offering, or IPO, reorganizing it from a private to a public form.
Apart from the private/public difference, there are two types of shares that firms can put into circulation: ordinary shares (common stocks) and senior (preferred) shares.
Ordinary shares
When people speak about shares they are usually have in mind common stocks. In actual practice, the vast majority of equities are released into circulation in this form. Ordinary shares represent a demand on earnings (dividends) and provide rights to vote. Investors usually obtain one vote per equity to choose members of board of directors who supervise the main decisions made by administration.
Over a long period of time, ordinary shares, with the aid of capital gains, has conduced to bring higher recoupment than private debt securities. This higher profitability leads to increasing costs, however, since ordinary shares bring more risks including the possibility to lose the whole sum invested if a company losses its business. If a firm becomes bankrupt and goes into liquidation, the common stockholders will not get money until the lenders, holders of debt securities and senior shareholders are paid.
Senior shares
Equity linked securities have similar characteristics as bonds and usually does not presuppose the rights of vote (however it depends on the company). With this type of shares, investors are usually assured a constant dividend in perpetuity. This is different than ordinary share, which has inconstant dividends that are fixed by the board of management and never warranted.
Another plus is that in the case of liquidation, preferred stockholders are paid off before the ordinary stockholders. Prior securities may also be “redeemable,”, that means that the company can make buyback transaction of the equities from preferred stockholders at any moment.
Ordinary and senior are the two basic types of shares; however, companies are able to issue different classes of equities.