THE TYPES OF STOCK
Now that you’ve learned the basics of stocks, what it is, and how it works, we can now learn more about them. The next thing you need to know about stocks are their types. There are only two major categories of stocks and they are the common stock and the preferred stock.
Common stocks are the majority of the stocks in the stock market. That’s why it’s called common. It is the basic definition of stocks as the shares in the ownership of a company that represents a claim or dividends on its earnings and assets. Majority of issued stocks are common stocks. The main idea is that an investor has one vote per share. He or she gets to vote on the board members that are the ones that manage and supervise major decisions that the company makes. Common stocks yield the highest returns among almost all the other investments given that they have grown over time and for a long term through capital growth. And as always, higher returns spell higher risks. This means that common stocks also have one of the highest risks among almost all other investments. In case of bankruptcy of the company with the stocks, common shareholders are the last to receive in the liquidation process. Creditors, bondholders, and preferred stockholders come first accordingly.
Preferred stocks are a level higher from common stocks. They represent ownership as well however, depending on the company, less power in the voting rights. What differentiates common stocks from preferred stocks is the guarantee in dividends. Preferred stocks are, more often than not, ensured of a dividend as long as the shareholders live and sometimes even beyond if he or she has a beneficiary. Other discrepancies from the common stockholders are that preferred stockholders are paid off first in case of bankruptcy in the liquidation. Some say that preferred stocks are highly similar to debts rather than to equities.
Common stocks and preferred stocks are the two main types. However, stocks are further classified depending on the company’s need for more classes of stocks. This further classification is anchored on different factors such as voting power, number of shares, number of investors in a class. These classes of stocks are traditionally named as Class A and Class B and so on.
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