What is the most senior type of security in the capital stack?

In the capital stack, secured debt holds the most senior position, which means it has the highest claim on the company’s assets in the event of liquidation or bankruptcy. This type of security is backed by specific collateral, which provides a cushion for lenders and reduces their risk.

Because the lenders of secured debt have rights to the collateral, they are prioritized during repayments over other types of securities. If a company faces financial difficulties, secured debt holders are first in line to recover their investments before any payments are made to unsecured debt holders, preferred stock investors, or common stock shareholders. This hierarchical structure is crucial in determining the risk associated with different types of securities, and secured debt being at the top reflects its reduced risk profile compared to other options.

In contrast, common stock represents ownership in a company but has the lowest priority in claims against assets. Mezzanine and preferred stocks fall between common stock and debt in terms of risk and claim priority, making them subordinate to secured debt. Unsecured debt, while also a liability, lacks the security of collateral and therefore comes lower in the capital stack compared to secured debt. This distinction underscores the importance of understanding the hierarchy within the capital structure and how it impacts investment risk and recovery potential.