Common Stock
When people mention stocks, they are usually referring
to this type. Actually, by means of this form, the majority of stock is issued.
Common shares represent ownership in a company and a claim (dividends) on a share
of profits. To elect the board members, investors get one vote per share,
who keep an eye on the major decisions, made by management.
Common stock, by means of capital growth, yields higher
returns than almost every other investment over the loan term. Since common
stocks entail the most risk this higher return comes at a cost.
The common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid in case if a company goes bankrupt and liquidates.
Preferred Stock
Some degree of ownership is represented by Preferred
stock but usually doesn't be associated with the same voting rights. Depending
on the company, this may vary.
Investors are usually guaranteed a fixed
dividend forever with preferred shares. This is contrary to common stock, which
has variable dividends that are never guaranteed.
Paying off the common shareholder over preferred
shareholders is another benefit in the event of liquidation of the preferred
stock. Preferred stock may also be callable, meaning that at anytime for any
reason, the company has the option to purchase the shares from shareholders.
Preferred stock is considered by some people owing to it's more
like debt than equity. Seeing them as being in between bonds and common shares
is a good way to think of these kinds of shares.
Different Classes of Stock
The two main forms of stock are common and preferred stocks;
however, it's also possible for companies to customize different classes of
stock by any means they want.
The most common reason for this is the company
wanting the voting power to remain with a certain group; as a result, different
voting rights are given by different classes of shares.
For example, one class
of shares would be held by a select group who are given ten votes per share
while a second class would be issued to the majority of investors who are given
one vote per share.
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