What are Common Stock and Preferred Stock?
For the beginning investor learning and understanding so many new ideas can get confusing. Especially, when it comes to looking for and choosing between the different types of stocks. The confusion can lead to frustration and actually cause some to disregard stock opportunities altogether or make bad investment decisions. There are two fundamental types of stock, common and preferred stock. When you’re getting into the market,you need to know the types of stock shares and their meanings. This article discusses the differences between common and proffered stock and will help define a better understanding of which is best for you.
For starters, Common Stock is whats talked about most frequently when it comes to the market. Unlike some stock investments, the opportunity to purchase common stock is available to anyone. Common stock shares are essentially part ownership of the business you own shares of. When your company succeeds and earns money, you earn money through the increase of your share value. If your company performs poorly or goes bankrupt, your stock will feel it as well. In the case of daily company operations the average common stock holder does not participate. It is up to the board of directors and the company to act in the shareholders best interest. However, when voting for board members shareholders can cast votes typically at the rate of one vote per share.
A higher end type of stock is called preferred stock. Preferred shares are not exactly a stock but, rather a mixture of a stock and bond. Like a common stock it represents partial ownership but, doesn’t provide the voting rights of a common stock holder. Another difference is that given the company’s financial situation they pay a dividend to preferred stock holders. However, the primary advantage for owners of preferred shares over common shares is that the holders are entitled to the assets of the company first in the event of bankruptcy. In addition, holders of preferred shares will obtain the product of the company’s profits before the owners of common stock. If preferred shares are of interest, understand that the company generally has the right to buy the stock back from the owner of stocks and stop paying dividends.
Although common stock and preferred stock are the two primary types of stocks, you will also come across shares that are divided into classes when trading in the market. Usually these stock classes will be broken into “A Shares” and “B Shares” The stock class shares differ from common stock in how voting rights are assigned. Class A stocks are purchased and held by company management and are given a greater number of votes per share. While “B shares” are made available to the public, they hold less voting power. Many investors avoid stocks that have more than one class, as for some the power to vote for company initiatives is important.
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