Stock Types Common & Preferred

 

Basics

When a company decides to raise capital (money), they often “go public” through what is known as Initia an Initial Public Offering (IPO) of stock.  l Public Offering (IPO). During this time they create stocks, or shares in a company.

When you own a stock, you are part owner of a corporation.  There are actually two different types of stocks "common" and "preferred".  Stocks can be listed on one of the major stock exchanges or on one of the electronic exchanges (see Stock Markets & Securities Exchanges  ) Some investors will trade stocks on a daily basis, and some will hold on to a well managed company’s stock for years.  Once you purchase shares of a company, if the stock goes up and you sell your shares, you will make money.  On the other hand, if the stock prices decline, you will lose money on your investment(s)

 

Common Stocks

When you hear most people talk about investing in stocks they are talking about common stocks.  When you buy a share of common stock, you own a share of the company that issues it.  When you own a stock it is known as equity ownership.  The price of the stock goes up and down depending not only on the performance of the company, but how investors and analysts think the company will perform in the future.  Other broader market issues can also affect stock prices (Economic Indicators & Other Causes That Can Affect Stock Prices Other Than Company News) As an owner of a common share, even just one, you are entitled to vote on major issues affecting the company and attend the annual shareholders meeting.



A stock may or may not pay dividends.  Dividends are a share of the company’s net profits (profits after all expenses and taxes have been paid) that are distributed by the company.  The Board of Directors determines the amount, if any, of the dividend (see Stock Dividends & Dividend Re-Investment Plan (DRIPs) ) . Dividends are usually paid quarterly, based on how much money the company earned, how much money they need to hold on to, to reinvest in the company and how much they can return to the shareholders.  If profits fall, dividend payments may be cut or eliminated.  Dividends are usually taxable in the year the shareholder receives them.

 

 

Preferred Stocks

Like common stock, with preferred stock you also have a share of ownership in the company.  Preferred stockholders have the first rights to dividends.  Most preferred stocks pay a fixed dividend, set at the time of issuance, stated in a dollar amount or as a percentage of the par value Bonds.  Preferred stocks are similar to corporate bonds, without a maturity date.  Because it is a fixed dividend, a preferred stock shareholder does not share in the potential growth of the company’s profits that a common shareholder would realize.  However, if a company goes bankrupt or liquidates, preferred stockholders have a better claim to the company’s assets than common stock shareholders (bond holders trump all stockholders).  Preferred shares do not change as often as common shares.