When thinking of common shares, think of “commoners.” Bricklayers, plumbers and other people who actually get their hands dirty and perform manual labor for a living. These people live at the bottom of the food chain. Yet they are the most powerful force in structuring society.
Common shareholders function the same way. They are the last to receive credits if a company defaults (fails to meet financial promises or obligations), but if a company does extremely well, it is the common shareholders who make the fortune. Did you hear that, bricks? You can go ahead and lay yourselves from now on.
In order of collection, if a company stops selling widgets and can no longer pay its bills (whatever is left of the company is sold on eBay or wherever with a judge administering the process and the proceeds go as follows):
The IRS collects ahead of everyone – why? Because they can.
Then there are the vendors – JoeBobBilly’s Plumbing Service is owed $1,412 for unclogging toilets for 5 months – he gets paid next.
Lower (“subordinated” but definitely with an inferiority complex) rated or junior bonds
Preferred stock (kind of like a bond but technically it is equity because it can be converted into common shares based on certain conditions)
Common stock (buzzword: “residual claim on assets”)
If you want the R-rated version of this, click here.