Stock represents an equity ownership in an entity, and normally, with certain exceptions, is given in exchange for a paid-in capital contribution to a business.
Ownership of stock does not entitle the holder to specific property or assets of the company, but rather, provides the holder with a share of the entity’s profits and gains, normally through the receipt of dividends.
The Supreme Court identified those characteristics usually associated with stock as “(i) the right to receive dividends contingent upon an apportionment of profits; (ii) negotiability; (iii) the ability to be pledged or hypothecated; (iv) the conferring of voting rights in proportion to the number of shares owned; and (v) the capacity to appreciate in value” (United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 851, 1975).
These are general features, and can vary depending upon a company’s Articles of Incorporation and the terms governing specific classes or stock.
Dividends: Although stockholders are generally compensated through dividends, a company can issue classes of stock that do not pay dividends, or it can issue different classes of stock with different rights and priorities with respect to dividends. For example, a company could issue a class of preferred stock that is entitled to a first payment of proceeds available for distribution as dividends relative to another class or classes.
Negotiability: Negotiability refers to the ability to buy and sell stock. A shareholder's ability to buy stock or sell stock it owns will depend upon a variety of factors, including the size and depth of the market for the company’s shares, if any exists, as well as the restrictions of the federal securities laws.
The stock of IBM or Google, for example, is highly liquid and can be purchased or sold with ease on an established exchange. There may not be a market for the stock of smaller or less established corporations, however, and many closely-held corporations' Articles of Incorporation do not permit sales to outside parties without prior consent.
Pledge: Like the other features identified by the Supreme Court, this is a common feature of stock but may not be present in all cases. Many small or closely-held corporations restrict the ability of shareholders to pledge or hypothecate their stock holdings.
Proportional Voting Rights: Stock may be issued as one or more series of common shares, all of which have the same rights and privileges with respect to voting, or it may represent preferred shares, which have some voting preference or additional rights relative to the entity’s common shares.
Similarly, a company can issue classes of non-voting stock. Notably, although the voting rights may vary with respect to classes of stock, stock within a class will all have the same proportional voting right, if any, as other shares of the same class.
Capacity to Appreciate in Value: As an equity interest, the value of stock will rise and fall with the success or failure of the company.
This feature is in contrast to debt issued by a company, which pays a fixed rate of interest regardless of the company’s changing fortunes (although the company’s success or failure may affect the price of a debt instrument on a secondary market, if any exists).
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THE AUTHOR OF THIS BLOG ARTICLE IS NOT A LAWYER AND HARVARD BUSINESS SERVICES, INC. IS NOT A LAW FIRM. THE ARTICLE ABOVE IS NOT INTENDED AS LEGAL ADVICE AND SHOULD NOT BE TAKEN AS LEGAL ADVICE. THIS SHORT ARTICLE IS STRICTLY TO MENTION SOME ASPECTS OF DELAWARE’S CORPORATION LAWS AND/OR LAWS RELATING TO OTHER FORMS OF ENTITIES WHICH YOU MAY NOT BE FAMILIAR WITH. WE RECOMMEND THAT YOU CONSULT WITH A LAWYER BEFORE FORMULATING A STRATEGY WHICH WILL BE SUITABLE FOR YOUR SPECIFIC CASE.