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 owners are the las🎀t in line to receive certain payouts, such as dividends or reimbursements in cases of bankrup💞tcy.

澳洲幸运5官方开奖结果体彩网:Common stock is a type of junior equity. It is considered subordinate, or junior, to 澳洲幸运5官方开奖结果体彩网: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官方开奖结果体彩网:shareholders if all of the company’s assets were 澳洲幸运5官方开奖结果体彩网:liquidated and its debts were paid off.

Not all sha꧑reholders have equal 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官方开奖结果体彩网: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官方开奖结果体彩网:bondholders, preferred shareholders, 🧜and other debtholders 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 publicly-traded company, needs money to buy more lemons in order to fulfill a major purchase order. Its management d𒈔ecides to issue bonds to raise money.

Business at Larry’s Lemonade then takes a turn for the worst, forcing it to shut down its op💞eration 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 and when all of those groups have been paid in full do the junior equity holders of common stock have an opportunity to receive any rem꧅aining assets. They are very u﷽nlikely to get anything back for their investment.

Advantages of Junior Equity

🔥While the potential risks are greater in junior equity, the potential rewards a🌼re greater as well.

Common stock has historically outperformed🍒 bonds and preferred shares. 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 tyꦜpe of st꧃ock to hold over the long term.

Unlike preferred stock, owning common stock also gives shareholders voting rights—meꦚaning they can have a voice, al𓆏beit 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官方开奖结果体彩网:junior debt. Also known as 澳洲幸运5官方开奖结果体彩网: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 be riskier for investꦅors, and thus pays higher interest rates than more senior debt from the same issuer.