When a company is first founded, its only shareholders are the co-founders and early investors. As the company grows and needs more capital to expand, it may issue more of its shares to other investors, so that the original founders may end up with a substantially lower percentage of shares than they started off with. With further growth, early investors may become eager to sell their original shares and monetize the profits of their early investments.
When people talk about stocks, they are usually referring to common stock, representing a claim on profits (i.e. dividends) and conferring voting rights. In fact, the great majority of stock is issued in this form. Whilst investors gain the power to vote and elect board members who oversee the major decisions made by management, they also place themselves at risk as the probability of losing the entire amount invested in a company goes out of business, is relatively high. This may happen since once a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are first paid.
In addition to common stock, however, there also exists another class of corporate shares that confers special rights that are not available to common shareholders. This class refers to preferred stock, which can essentially be regarded as a premium or priority share that a company issues to senior investors. One of the most noteworthy rights that preferred shareholders enjoy is the right to receive dividends before common stock shareholders. This means that the preferred shareholders will be paid first and any dividends left over will then go to the common shareholders.
