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What Are Junior Stocks?

Updated on January 9, 2015

There are two main kinds of stocks: junior or common stocks and senior or preferred stocks.

Junior stocks have everything to do with the world of finance, especially when it comes to private corporations, because the government does not give out junior stocks. A stock is the money invested by an individual or business. The earnings a company makes and risks a company takes both affect the price of a stock. There are two main kinds of stocks: junior or common stocks and senior or preferred stocks.

Junior or Common Stock

Junior or common stocks give their owners a limited liability. This means that common stockholders who own a percentage of a company can’t lose more money than their economic contributions. Their personal assets aren’t at risk even if the company suffers financial difficulties. These owners also have rights; for example, they can vote and speak their mind about the company’s decisions and gain dividends. The junior stock is the share issued to employees of a private corporation and is always subordinate to preferred stocks. This means that if a company goes bankrupt and is liquidated, the owners of a junior stock will be paid after the senior or preferred stock.

Senior or Preferred Stock

Preferred stocks give their stockholders certain privileges. The most important privilege is that there are normally fixed return payments in the form of quarterly dividends instead of semi-annual interest payments, such as some bonds. However, its price fluctuates around the nominal value of the share issued. In addition, it’s also paid before the common stock and generally don’t grant voting rights. Stocks can be bought or sold, usually in the context of a securities exchange. As an incentive to invest in start-up companies, some offer the option of purchasing a convertible preferred stock, which can be converted to a common stock at some time in the future at a favorable price.

Dividends

A dividend is the proportion of a company’s profits that’s distributed among shareholders. It’s also understood as the amount that the board of shareholders of any company decides to pay its stockholders. Dividend distribution depends on the laws of the country and the consent of the company’s shareholders. The dividend can be a constant proportion of profits. There may be a minimum performance that guarantees a return on a shareholder’s investment. Stockholders may receive regular and extra dividends during a certain period, supplemented by additional dividends if permitted. Finally, there are residual dividends that are distributed after all legal commitments.

Equity Claim or Residual Claim

This claim is related to a company’s profits and junior stock. The term is used when a stockholder decides to claim equity payments against financial assets during the liquidation of a company. Factors that can affect the value of the claim include the depreciation of assets, changes in the company’s profitability, share repurchases, new issuances of stock and dividend payments, especially to preferred stockholders.

References

  • Maps of World: Definition of Share - http://finance.mapsofworld.com/financial-market/share/

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