There
are two main types of stocks: common stock and preferred stock.
Common Stock: Common stock is, well, common. When
people talk about stocks, in general they are most likely referring to this
type. In fact, the majority of stock issued is in this form. We basically went
over features of common stock in the last section.
Common shares represent ownership in a company and a claim
(dividends) on a portion of profits. Investors get one vote per share to elect
the board members, who oversee the major decisions made by management.
Over the
long term, common stock, by means of capital growth, yields higher returns than
almost every other investment.
This higher return comes at a cost since common stocks
entail the most risk. If a company goes bankrupt and liquidates, the common
shareholders will not receive money until the creditors, bondholders, and
preferred shareholders are paid.
Preferred Stock
Preferred
stock represents some degree of ownership in a company but usually doesn't come
with the same voting rights. (This may vary depending on the company.) With
preferred shares investors are usually guaranteed a fixed dividend forever.
This
is different than common stock, which has variable dividends that are never
guaranteed. Another advantage is that in the event of liquidation preferred
shareholders are paid off before the common shareholder (but still after debt
holders).
Preferred
stock may also be callable, meaning that the company has the option to purchase
the shares from shareholders at anytime for any reason (usually for a premium).
Some people consider preferred stock to be more like debt than equity. A good
way to think of these kinds of shares is to see them as being in between bonds
and common shares.
Different Classes of Stock
Common
and preferred are the two main forms of stock; however, it's also possible for
companies to customize different classes of stock in any way they want.
The
most common reason for this is the company wanting the voting power to remain
with a certain group; hence, different classes of shares are given different
voting rights.
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.
When there is more than one class
of stock, the classes are traditionally designated as Class A and Class B.
Berkshire
Hathaway (ticker: BRK), the company of Warren Buffett (one of the greatest
investors of all time), has two classes of stock. The different forms are
represented by placing the letter behind the ticker symbol in a form like this:
BRKa, BRKb or BRK.A, BRK.B.
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