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: Trading Stocks and Order Types
  6. Stocks Basics: Bulls, Bears & Market Sentiment
  7. Stocks Basics: How to Read A Stock Table/Quote
  8. Stocks Basics: Valuing Stocks
  9. Stocks Basics: Conclusion

When a company is first founded, the only shareholders are the co-founders and early investors. For example, if a startup has two founders and one investor, each may own one-third of the company’s shares. As the company grows and needs more capital to expand, it may issue more of its shares to other investors, so that the original founders may end up with a substantially lower percentage of shares than they started with. During this stage, the company and its shares are considered private. In most cases, private shares are not easily exchanged, and the number of shareholders is typically small.

As the company continues to grow, however, there often comes a point where early investors become eager to sell their shares and monetize the profits of their early investments. At the same time, the company itself may need more investment than the small number of private investors can offer. At this point, the company considers an initial public offering, or IPO, transforming it from a private to a public company.

Aside from the private/public distinction, there are two types of stock that companies can issue: common stock and preferred shares.

Common Stock

When people talk about stocks they are usually referring to common stock. In fact, the great majority of stock is issued is in this form. Common shares represent a claim on profits (dividends) and confer voting rights. Investors most often get one vote per share-owned to elect board members who oversee the major decisions made by management.

Over the long term, common stock, by means of capital growth, has tended to yield higher returns than corporate bonds. This higher return comes at a cost, however, since common stocks entail the most risk including the potential to lose the entire amount invested if a company goes out of business. 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 functions similarly to bonds, and usually doesn't come with the same voting rights (this may vary depending on the company, but in many cases preferred shareholders do not have any voting rights). With preferred shares, investors are usually guaranteed a fixed dividend in perpetuity. This is different than common stock, which has variable dividends that are declared by the board of directors and never guaranteed. In fact, many companies do not pay out dividends to common stock at all.

Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders and other creditors). Preferred stock may also be “callable,” meaning that the company has the option to re-purchase the shares from preferred shareholders at any time for any reason (usually for a premium). An intuitive way to think of these kinds of shares is to see them as being somewhat in between bonds and common shares.

Common and preferred are the two main forms of stock; however, it's also possible for companies to customize different classes of stock to fit the needs of their investors. The most common reason for creating share classes is for the company to keep voting power concentrated 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 perhaps ten votes per share while a second class would be issued to the majority of investors who are given just one vote per share. When there is more than one class of stock, the classes are traditionally designated as Class A and Class B, etc.. For example, billionaire Warren Buffett’s company Berkshire Hathaway has two classes of stock, 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
Related Articles
  1. Investing

    What are Preference Shares?

    Preference shares, also referred to as preferred shares, are equity shares that give the shareholders certain rights ahead of common shareholders. For instance, when the corporation declares ...
  2. Managing Wealth

    The Advantages of Preferred Dividends

    Preferred dividends are cash distributions a company pays on its preferred shares.
  3. Investing

    What are Class B Shares?

    Class B shares are one classification of common stock issued by corporations.
  4. Managing Wealth

    Knowing Your Rights As A Shareholder

    We delve into common stock owners' privileges and how to be vigilant in monitoring a company.
  5. Managing Wealth

    What is Convertible Preferred Stock?

    Convertible preferred stock is preferred stock that can be converted into common stock as of a predetermined date at a specified ratio.
  6. Investing

    What You Should Know About Preferred Stocks and Interest Rates

    These are the pros and cons of preferred stocks in a rising interest rate environment.
  7. Investing

    Valuation Of A Preferred Stock

    Determining the value of a preferred stock is important for your portfolio. Learn how it's done.
  8. Financial Advisor

    What Is The Difference Between Preferred Stock And Common Stock?

    Most investors are familiar with common stock, but many know little about another form of company ownership: preferred stock.
  9. Managing Wealth

    The Different Between Preferred and Common Stock

    Preferred and common stocks are different in two key ways.
  10. Managing Wealth

    Keeping Control of Your Business After the IPO

    Taking a company public doesn't mean founders must completely give up calling the shots. Before the IPO, consider these tactics to keep control after it.
Frequently Asked Questions
  1. Where else can I save for retirement after I max out my Roth IRA?

    The first option to explore is to determine if you can contribute to a 401(k), 403(b), or 457 plan at work. If your employer ...
  2. How did George Soros "break the Bank of England"?

    In Britain, Black Wednesday (September 16, 1992) is known as the day that speculators broke the pound. They didn't actually ...
  3. What counts as "debts" and "income" when calculating my debt-to-income (DTI) ratio?

    It's important to know your debt-to-income ratio because it's the figure lenders use to measure your ability to repay the ...
  4. Who are Monsanto's main competitors?

    Learn about Monsanto Company's two main operating divisions and its main competitors within each sector, including The Mosaic ...
Trading Center