Stock types

by Jonathan Adams

Stocks have two types, and they are: Common Stock and Preferred Stock.

The first is Common Stock which is referred to by people as common stocks. In fact, this is the major category of stock issued. These represent ownership in a company and a claim (dividends) on a portion of profits. Investors have one vote per share to elect the board members, who oversee the major functioning and management decisions.

Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. In case of a company’s bankruptcy and liquidation, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.

Second is the Preferred Stock which represents some degree of ownership in a company but generally doesn’t have the same voting rights, depending on the company. Preferred shares, guarantee investors a fixed dividend forever. This is not in the case of common stock, which has variable dividends that are never guaranteed.

Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder but still after debt holders. Preferred stock may also be callable, which means that the company has the option to purchase the shares from shareholders at any time for any reason which is usually for a premium. Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is being between bonds and common shares.

Although Common and preferred stocks are the two main forms of stocks, companies also customize different classes of stock in any way they want. The most common reason for this is the company wanting the voting power to remain with a certain group; therefore, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group with ten votes per share whereas a second class would be issued to the majority of investors with one vote per share.

This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.

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