Buying Shares – Chapter 3: Different Classes of Stocks

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Updated: Mar 5, 2019, 13:14 GMT+00:00

This is chapter number 3 out of 19. Read the rest: Read Buying Shares – Everything that you Wanted to Know but were too Scared to Ask – Chapter 1:

Buying Shares – Chapter 3: Different Classes of Stocks

This is chapter number 3 out of 19. Read the rest:

Read Buying Shares – Everything that you Wanted to Know but were too Scared to Ask – Chapter 1: Introduction
Read Buying Shares – Chapter 2: What are Stocks and Shares?

Are you a beginner to the world of stocks and shares? If so, you may be wondering what a stock really is? In simple terms, it’s a division of ownership in a company. When you possess single or multiple shares, you are called a shareholder, and you are entitled to a portion of the company’s earnings, through dividends.

There are on the whole two main kinds of stocks: common stock and preferred stock.

Common stock: As its name suggests it’s the most common type of stock. The majority of stocks are issued in this form only. It corresponds to rights in a company and a claim on a part of profits in the form of dividends. The dividend sum rises and falls from time to time and is not guaranteed. Shareholders are allowed one vote per share to choose the board members, who keep an eye on the bigger decisions made by the company’s administration. Common stock, over time gives way to higher returns on your investment than nearly every other venture. This higher return comes at a price though, since common stocks bring about the greatest risk. If a company goes bankrupt and becomes liquidated, the common shareholders will not get money until everyone else including the creditors, bondholders and preferred shareholders are paid out first.

Preferred stock: Preferred stock characterizes some extent of ownership in a company but generally doesn’t come with the same voting rights. It is the safer option though, as investors are generally assured a stable dividend as long as they hold this stock. This is unlike the common stock, which has changeable dividends that are never assured. Another benefit is that in the incident of liquidation, preferred stock shareholders are paid off before the common stock shareholder. In most cases with preferred stock the company has the right to buy the shares from shareholders at anytime for any reason.

Many people consider preferred stock to be more like bonds though in that it is considered company debt than owning equity in that company. Companies that issue preferred stocks generally pay steady dividends and preferred stock has first call on dividends over common stock.

Investors purchase preferred stock for its ongoing profits from dividends rather then long term future profits which is relevant to common stock, so you’ll be making regular profits from dividends as a flat rate

Liquidity

An additional benefit of common stocks is that there is plenty of opportunity to buy them as the majority of larger companies do business daily creating an opportunity to trade in their shares.

You can trade shares of most publicly floated companies almost any day the markets are open on the Stock Market.

The Bulls and the Bears

Buying Shares – Chapter 3: Different Classes of Stocks

A bull market is when the financial system and employment system is in fine shape, the unemployment figure is low, and stock prices are increasing. It’s simple to choose stocks during a bull market because almost everything is going up.

A bear market occurs when the financial system is in an awful shape, recession is just around the corner and stock prices are taking a hammering. It is very difficult to choose high-performing stocks during these times. Yet, for some investors this is just the time to buy a stock, buy low hold on to the stock and sell high!

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Table of Contents

Intro

Intro