Today I’d like to discuss shares of corporations.
Generally speaking, there are two types of shares in a mid-sized corporation: common shares and preferred shares.
Common shares give shareholders the right to vote in the annual general meeting. If a group of shareholders holds the majority of the common shares, they have the power to appoint the board of directors and have certain control over the management. On the other hand, common shares often pay little or no dividend.
Preferred shares typically don’t come with voting rights, but they generally have prescribed annual dividends. That being said, it’s important to remember that the prescribed rate is only a promise to pay, and that the corporation is under no legal obligation to honour it. In other words, holders of preferred shares have little or no right to force the corporation to pay dividends as promised.
In reality, however, for publicly traded companies, any failure to pay dividends on preferred shares often sends the stock price for a nose-dive, as it signals financial distress of the company.
If you want to buy preferred shares, you should find out whether the dividends are cumulative or not. If a preferred share is said to be cumulative, it means that any missed dividend payments are carried over to the next payout. On the other hand, if it’s non-cumulative, the shareholders won’t have remedies on missed payments.
