11. Kinds of Stock. As a rule the capital stock of a corporation is of two classes—common and preferred—though not all corporations issue both classes.
Common Stock is the stock of a corporation issued to all stockholders under the same conditions, and which is to share equally in the dividends.
Preferred Stock is stock which gives its owner certain preferences over the owners of common stock. This preference usually consists of a provision for the payment of certain dividends out of the net earnings of the business before any dividends can be paid on common stock. The officers of a corporation have no power to issue preferred stock unless it is provided for in the charter. Preferred stock may, however, be issued with the consent of all common stockholders. Preferred stock falls into subdivisions depending upon its provisions as follows:
Cumulative preferred stock is stock on which the payment of dividends is not dependent upon the earnings of one year. If a dividend is passed in one year or if not paid in full, it must be paid from future earnings before common stock can draw dividends.
Non-cumulative preferred stock is stock which carries a dividend preference only in respect to the earnings of the current year. While dividends are payable prior to dividends on common stock, no liability attaches to the corporation if earnings in any year are insufficient to pay dividends.
Guaranteed Stock is another name for cumulative or non-cumulative preferred stock—any stock on which the payment of dividends is guaranteed.
A corporation may issue more than one series of preferred stock, as first preferred, second preferred, etc. These issues take preference in the payment of dividends in the order of their priority. Dividends must be paid on first preferred before any surplus is available for the payment of dividends on second preferred.
12. Treasury Stock. This is stock subscribed for and issued which has been acquired by the corporation either by purchase or donation. The term is often erroneously applied to that part of the authorized capital stock which has never been issued, and the error has even been made of referring to it as unsubscribed stock. Treasury stock is an asset and should be so treated on the books of the corporation. Unsubscribed or unissued stock is in no sense an asset; or as one writer puts it, no more an asset than the power of a person to issue notes is an asset.
13. Watered Stock. Any stock which is not represented by actual assets is called watered stock. It is usually represented by fictitious assets—as patents, copyrights, franchises, promotion expense, goodwill, etc.
STOCK SUBSCRIPTIONS