When several individuals or, perhaps, a large number contribute the capital an enterprise needs, some may be so confident of the success of the business that they are willing to wait for their shares of the profits until the less optimistic investors have been paid.
In compensation for the risk they assume, they naturally will require a possibility of receiving larger profits, and perhaps the right to have a dominating influence in the control of the company.
On the other side, there will be the cautious investor, who prefers to be more certain of a profit, even though it be small.
How will it be possible to give both of these classes of prospective owners of the enterprise what they desire? Simply through the creation of different classes of ownership or stock one class of stock being known as common or ordinary stock, the other being called preferred stock.
The most usual kind of preferred stock is that designated as preferred as to dividends, by which is meant that the holders of such stock must receive, annually, out of the first profits earned by the corporation and distributed by the directors, an amount equal to a specified percentage of the amounts of their investments.
The preferred stock having received its stipulated dividend, the balance of the profits belongs to the common.
If the preferred stock is of the class known as cumulative, the holders will be more certain of receiving their preference dividends, for if the stipulated dividends on cumulative preferred stock are not paid in any one year or series of years, they accumulate as a claim against future profits, and must be paid before the common stockholders can receive any dividends whatever.