Stocks Basics: Different Types Of Stocks
  1. Stocks Basics: Introduction
  2. Stocks Basics: What Are Stocks?
  3. Stocks Basics: Different Types Of Stocks
  4. Stocks Basics: How Stocks Trade
  5. Stocks Basics: What Causes Stock Prices To Change?
  6. Stocks Basics: Buying Stocks
  7. Stocks Basics: How to Read A Stock Table/Quote
  8. Stocks Basics: The Bulls, The Bears And The Farm
  9. Stocks Basics: Conclusion

Stocks Basics: Different Types Of Stocks


There are two main types of stocks: common stock and preferred stock.

Common Stock
Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. We basically went over features of common stock in the last section. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management.

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. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid.

Preferred Stock
Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than 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, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (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 to see them as being in between bonds and common shares.

Different Classes of Stock

Common and preferred are the two main forms of stock; however, it's also possible for companies to 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 who are given ten votes per share while a second class would be issued to the majority of investors who are given one vote per share.

When there is more than one class of stock, the classes are traditionally designated as Class A and Class B. Berkshire Hathaway (ticker: BRK), has two classes of stock. The different forms are represented by placing the letter behind the ticker symbol in a form like this: "BRKa, BRKb" or "BRK.A, BRK.B".

Stocks Basics: How Stocks Trade

  1. Stocks Basics: Introduction
  2. Stocks Basics: What Are Stocks?
  3. Stocks Basics: Different Types Of Stocks
  4. Stocks Basics: How Stocks Trade
  5. Stocks Basics: What Causes Stock Prices To Change?
  6. Stocks Basics: Buying Stocks
  7. Stocks Basics: How to Read A Stock Table/Quote
  8. Stocks Basics: The Bulls, The Bears And The Farm
  9. Stocks Basics: Conclusion


RELATED TERMS
  1. Markdown

    The difference between the highest current bid price among dealers ...
  2. Catalyst

    A catalyst in equity markets is a revelation or event that propels ...
  3. Investing

    The act of committing money or capital to an endeavor with the ...
  4. Futures Market

    An auction market in which participants buy and sell commodity/future ...
  5. Capital Markets

    Capital markets are markets for buying and selling equity and ...
  6. Equity Market

    The market in which shares are issued and traded, either through ...
RELATED FAQS
  1. How did the stock market operate prior to the Securities and Exchange Commission?

    The first American stock markets were established in Philadelphia in 1790 and New York in 1792. Trading was largely dominated ... Read Full Answer >>
  2. How did Nathan Rothschild become a stock exchange speculator?

    Market maker Nathan Rothschild learned much of his financial savvy from his father, who dealt in coins and paper money. He ... Read Full Answer >>
  3. What is finance?

    "Finance" is a broad term that describes two related activities: the study of how money is managed and the actual process ... Read Full Answer >>
  4. What is the 'Rule of 72'?

    The 'Rule of 72' is a simplified way to determine how long an investment will take to double, given a fixed annual rate of ... Read Full Answer >>
  5. What is a stock split? Why do stocks split?

    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>
  6. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  6. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
Trading Center