I read the following passages on investopedia:

"Every company has a hierarchical structure of rights for the three main classes of securities that companies issue: bonds, preferred stock, and common stock. In other words, there’s a pecking order of rights."

That was my understanding as well. Then I read the following passages:

“The priority of each class of security is best understood by looking at what happens when a company goes bankrupt. You may think that as a common shareholder with an ownership stake in the company, you would be first in line to receive a portion of the company’s assets if it went bankrupt. In reality, common shareholders are at the bottom of the corporate food chain when a company liquidates. During insolvency proceedings, the creditors are the first to have their outstanding debts paid from the company’s assets.”

“The bondholders are the next priority followed by preferred shareholders and, finally, the common shareholders. This hierarchy is determined by what’s called “absolute priority,” the rules used in bankruptcies to decide which portion of the payment will be received by which participants.”

Source: https://www.investopedia.com/investing/know-your-shareholder-rights/

If I'm understanding this correctly, this article is proposing the following order for getting paid:

  1. Creditors
  2. Bondholders
  3. Preferred stock shareholders
  4. Common stock shareholders

I don't understand what the difference is between a creditor and bondholder. Can someone explain how they are different?


1 Answer 1


A creditor is someone you owe money to. A bondholder is someone that holds a formal promissory note.

A company's employees are creditors-- they've done work for the company, they're owed money, they haven't intended to loan that money to the company. It's just rather impractical for the company to walk around to every employee every hour and hand over $x. Similarly, the people that deliver bagels for the breakroom, the company that supplies the building with electricity, etc. are creditors who expect the company to settle up at the end of the month when the invoices come in. Those folks are first in line in the event of a bankruptcy. In this sense, creditors can generally be thought of as being owed money immediately (generally being key here, a creditor might have agreed to getting paid over a period of time, though that would be unusual).

A bondholder holds a registered debt instrument (a bond) issued by the company with well-defined repayment terms. Those bonds are generally long-term obligations so you can generally think of bondholders as people that are owed money over time (nothing stops a company from issuing 1-month zero coupon bonds, that would just be rather odd).

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