Common Stock

• A certificate of stock is a record of an ownership interest in a corporation. Common stock confers the right to vote on important matters affecting the corporation, such as electing directors to the board, or on sale of the corporation.
  
  Common stock also has a general right to a proportional share of dividends, so long as the board declares them in a given year. These typical rights of common stock can be altered by the corporate charter.
  
  

Preferred Stock

• Preferred stockholders are entitled to receive dividends before common stock when the board of directors declares dividends. However, preferred stockholders generally have no right to vote on corporate matters, unless the board fails to declare dividends for certain period of time (usually set by statute).
  
  Preferred shares can be cumulative, meaning that if the board fails to declare dividends, the common stock receives no dividends until the corporation satisfies the backlog of dividends owed to the preferred shareholders. Or they can be non-cumulative, meaning that if the board fails to declare dividends, all right to dividends is forfeit for that year.
  
  

Debt

• The term "corporate debt" refers to debt securities. Corporate debt comes in two forms. Short-term corporate loans, usually requiring repayment within a couple of days, are known as commercial paper.
  
  Corporations issue long-term debt in the form of bonds. A bond essentially represents an investor's loan to the corporation. Some corporations issue "senior bonds," which have a higher priority in repayment.
  
  

Absolute Priority Rule

• Should a corporation go bankrupt, its creditors have a right to repayment before the shareholders do. The law recognizes the principle that a debtor (or its shareholders) should not be repaid out of corporate assets before all creditors are satisfied; this is known as the absolute priority rule. Once the corporation is liquidated, the proceeds go first to satisfy debt creditors, then to preferred shareholders, and then to common stockholders.
  
  

Comparison

• Compared with common stock, preferred stock really represents less of a right to control and more of a right to repayment. However, preferred stock is still an ownership interest; the investor is effectively "casting his lot" with the corporation.
  
  Debt, on the other hand, does not confer any ownership interest beyond the rights of a creditor. If the investor wants a share of profits, stock is advantageous, and if he wants those profits at the expense of control, preferred stock is better. But if the investor merely wants a reasonable rate of return on a loan--and the certainty of being first in line in case of liquidation--debt securities are more effective.