Dividends on preferred stock must be paid before dividends on common stock. Common Stock is the residual claim to the earnings of the corporation. Payment of dividends is discretionary. Investment companies sell shares to the public and use the proceeds to invest in debt and equity instruments. Open-ended investment companies are known as mutual funds.
All transactions take place between the mutual fund and the investor.
The price that the mutual fund will buy or sell shares is pegged at the net asset value of its portfolio of securities. A close-ended fund obtains all of its capital with some initial public offering. After the offering, the shares trade on the secondary market. Options give the owner the right to buy or sell a particular security at a prespecified price on or before a prespecified expiration date. Note that the option has no direct claim on the assets of the firm.