Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Voting Shares

What it is:

Voting shares are shares of stock that allow the owner to vote on company matters.

How it works (Example):

Stocks, also known as equities, represent ownership interests in corporations. If you own one, 100, or 100 million shares of stock in a company, you're an owner of the company.

Corporations sell stock, or ownership in the company, in return for cash to run their businesses. There are a number of different kinds of stocks, and their classifications largely depend on the rights they confer on the holder. Investors evaluate these categories based on their investment objectives, and they look for stocks that meet those objectives. The two most popular categories of stock are common stock and preferred stock.

The most prominent characteristics of common stock are that they entitle the shareholder to vote on corporate matters (typically, the shareholder gets one vote for every share he or she owns, though that is not always the case) such as whether the company should acquire another company, who the board members should be, and other big decisions. Common stock also often comes with pre-emptive rights, which means the shareholder has a "right of first refusal," or first dibs on buying any new stock the company tries to issue.

Perhaps the most important attribute of common stock is that their holders are the last in line when it comes to getting their money back. If the company goes bankrupt and has to sell off all its assets, the cash from the asset sale first goes to pay off lenders, employees, and lawyers. The shareholders get whatever is left (which is usually nothing, or just a few pennies for every dollar they originally invested).

This pecking order is why preferred stock, the other popular category of stock, exists. Although preferred shares aren't usually voting shares, they usually receive a steady dividend and their claim to the company's assets "outrank" the common stockholders' claims (i.e., in the event of bankruptcy, the company must pay off lenders, preferred shareholders, employees, and lawyers before the common shareholders get anything).

Why it Matters:

Voting shares carry a lot of power, and they represent the inherent communal nature of the ownership of corporations. Plenty of companies also issue nonvoting shares so that the voting shares can be retained by the founding family, for example, or the original investors, and these actions only emphasize the power inherent in voting shares. Without shareholders voting in approval, corporations often can't do things such as re-elect directors or merge with another company, for example. Accordingly, investors must consider the voting rights attached to any investment and decide whether those rights are important.