What Is Junior Equity?

Junior equity is stock issued by a company that ranks at the bottom of the priority ladder in terms of ownership rights. Its o𒁃wners are the last in line to receive certain payouts, such as dividends or reimbursements in cases of bankruptcy.

澳洲幸运5开奖号码历史查询:Common stock is a type of junior equity. It is considered subordinate, or junior, to 澳洲幸运5开奖号码历史查询:preferred stock.

How Junior Equity Works

Equity, a form of ownership often represented by shares of stock, represents the amount of money that would be returned to 澳洲幸运5开奖号码历史查询:shareholders if all of the company’s assets were 澳洲幸运5开奖号码历史查询:liquidated and its debts were paid off.

Not all shareholders have equ♛al rights, though. There is a pecking order determining who can claim company assets first—and owners of junior, aka subordinate, equity sit at the 👍bottom of it.

That means that in the event of a 澳洲幸运5开奖号码历史查询:bankruptcy, holders of junior equity may get no compensation. These owners of common stock have rights to a company's assets only after 澳洲幸运5开奖号码历史查询:bondholders, preferred s🍸hareholders, and other d🍨ebtholders are paid in full.

Junior equity also takes a back seat to preferred stock when it comes to income distribution. Owners of preferred stock shares receive an agreed-upon dividend at regular intervals, making these distributions similar to bonds' coupon payments.

Owners of common stock may or may not receive a dividend, and its amount fluctuates depending on the company's earnings. Compensating preferred stockholders takes priority.

Example of Junior Equity

🥂Larry’s Lemonade, a publi𒀰cly-traded company, needs money to buy more lemons in order to fulfill a major purchase order. Its management decides to issue bonds to raise money.

Buꦰsiness at Larry’s Lemonade then takes a turn for the worst, forcing it to shut down its operation and declare bankruptcy. It owes money to its employees and its suppliers🦂 as well as its bondholders and shareholders.

Everyone with a stake in the company is eager to collect what they're owed. All of the company's assets must be sold to raise money, including any leftover supplies, equipment, warehouses, and offices.

Once the business has been liquidated its assets can be distributed. The first priority goes to the bondholders, those who lent Larry's Lemonade capital to buy more lemons, followed by its other debtors.

Only if 𓃲and when all of those groups have been paid in full do the junior equity holders of common ꦫstock have an opportunity to receive any remaining assets. They are very unlikely to get anything back for their investment.

Advantages of Junior Equity

While the potential risks are greater in junior equity, thꦿe potential rewards are greater as well.

Common stock has historically outperformed bonds and 🐻preferred sharꦐes. Preferred shares typically do not reflect appreciation to the same degree as common stock. Their prices tend to stay around their initial issue price, behaving more like bonds than common stock shares. 

When a company thrives, junior equity 🍃is generally the best♏ type of stock to hold over the long term.

Unlike preferred stock, owning common stock also gives shareholders voting rights—meaning t🌃hey can have a voice, albeit a very quiet one, in how the business is run. 

Special Considerations

A counterpart to junior equity in the debt world is 澳洲幸运5开奖号码历史查询:junior debt. Also known as 澳洲幸运5开奖号码历史查询:subordinated debt, it refers to bonds, loans, or other obligations issued with a lower priority for repayment than other, more senior debt claims in the case of the issuer's default. As a result, junior debt tends to b🅰e riskier for investors, and thus pays high🦩er interest rates than more senior debt from the same issuer.