Stock is an ownership interest in a corporation. If a CORPORATION issues only one type of equity security, it is called common stock, the kind normally issued by corporations. The common stockholders are the residual EQUITY in the corporation and are the only class of stockholders to have voting rights, one vote for each common share owned. Most common stock also carries a preemptive right, where existing stockholders have the privilege to purchase new issues before they are offered to the public for sale. This allows current stockholders to maintain the same percentage ownership in the corporation after a new issue is sold as they had prior to the new offering. The preemptive right is also crucial in preventing a dilution of value for existing stockholders when a new stock issue is sold at a lower market price than previous shares. Par-value common stock and no-par-value common stock are issued by corporations. Originally conceived to establish a minimum legal CAPITAL to serve as protection for creditors, par value has little significance today. However, it still remains that if a common stock has a par value, that stock cannot be initially offered at less than its par value. When common stock is issued at a price above its par value, the excess of price over par value is recorded in the equity account: Contributed Capital in Excess of Par Value, Common Stock. Preferred stock is also an equity security, but unlike common stock, it carries no voting rights. Preferred stocks have par values, a percentage of which is paid to the preferred stockholders when DIVIDENDs are declared. Preferred stock is named for the dividend preference that preferred stockholders enjoy over the common stockholders. The three types of dividend preference, listed here from the weakest to the strongest in terms of dividend-earning power, are current dividend preference, cumulative dividend preference, participating dividend preference. Current dividend preference requires the preferred stockholders to receive dividends from a current dividend being paid and common stockholders to receive dividends only if there is any current dividend remaining after the preferred stockholders have been paid in full. In the case of a small dividend where there are insufficient funds to pay dividends to all stockholders, the preferred stockholders will receive dividends, and the residual, if any, will be shared by the common stockholders. Cumulative dividend preference operates much in the same way as current dividend preference, but it is more powerful. In years when there is no dividend declared by the BOARD OF DIRECTORS or when the declared dividend has been so small as to be insufficient to pay in full the preferred dividends, the dividends which the preferred stockholders are entitled to but have not yet received are called “dividends in arrears.” Cumulative dividend preference requires dividends in arrears to be paid before any other distributions of a current dividend. After the dividends in arrears are caught up and paid, then current dividend preference is applied to the remaining dividends to be distributed. Participating dividend preference operates like cumulative dividend preference, except that when the cumulative dividend preference has been satisfied, the preferred stockholders then share the remaining dividends to be distributed with the common stockholders on a pro rata basis. By taking a larger share of the declared dividends, these dividend preferences benefit the preferred stockholders at the expense of the common stockholders. Like common stock, when preferred stock is issued for more than its par value, the excess of price over par value is recorded in the equity account: Contributed Capital in Excess of Par Value, Preferred Stock. The issuance of common and preferred stocks is an important source of capital for corporations. For a variety of reasons, occasionally a corporation will purchase (buy back) its own shares from the open market. Stock shares that have been previously issued but repurchased by the issuing corporation are called treasury stock. Treasury stock has the status of “issued, but not outstanding.” The custom of “one vote per share” does not apply to treasury stock as long as it is held by the issuing corporation. Treasury stock is a contra equity account, has a normal debit balance, and reduces total stockholder equity as long as it remains not outstanding.