Bonds

• Bonds operate in much the same manner as a loan. A buyer pays the corporation a certain amount and receives a bond in return. The bond entitles the buyer to regular interest payments (at fixed intervals in amounts dependent upon the corporation). Each bond also has a specified maturity date, at which point the corporation must pay back the entire amount of the buyer's investment. Typically, these interest and repayment rights are the bondholder's only rights in the corporation. Note that governments also issue bonds, and these bonds may operate in a slightly different manner.
  
  

Preferred Stock

• In contrast to bonds, a share of preferred stock entails actual ownership of a corporation. The proportion of ownership depends on how many shares of stock the corporation has released into the market. But unlike common shareholders, preferred shareholders typically don't get involved in running the company. They don't vote on corporate director or make similar corporate decisions.
  
  

Preferred Stock Rights

• In a typical corporation, the corporation's governing documents (bylaws, articles of incorporation and shareholder agreements) determine the rights and obligations of preferred shareholders. Such rights may vary, but in a typical corporation, the preferred shareholders have the right to periodic dividend payments in amounts fixed by the corporation. If the board of directors does not make the dividend payment when it's due, the preferred shareholders may be granted the right to vote on the board's composition.
  
  

Preferred Stock Types

• Preferred stock may be convertible, meaning that the shareholder has the right to exchange preferred for common stock at any time. Cumulative preferred stock allows the preferred shareholder to receive repayment of any missed dividend payments before other types of shareholders receive similar repayment. Corporations may also have different levels of preferred stock, with different seniority in the hierarchy of repayment.
  
  

Liquidation Priority

• When a corporation decides to liquidate (voluntarily or involuntarily), the corporation must repay its debt first. The law considers bondholders creditors, so they receive the first repayment, along with vendors, lenders and other creditors. Only when all creditors have received repayment does the corporation reimburse its shareholders. Preferred shareholders receive repayment of their investment first (although, as noted above, there may be an order of reimbursement for preferred shares), before common shareholders. This priority in liquidation becomes important when a corporation does not have enough assets to reimburse everyone.