2 Basic kinds of Stocks

Before you invest in stocks, it’s important to know what your options are. There are a myriad of securities you can buy, and there are different choices you can choose from Forex Bonus. We’ll focus on two main types of stocks—the common stocks and the preferred stocks.

How are stocks formed?

Initially, the only owners of a company are the co-founders and early investors. If a startup has two co-founders and two investors, each of them owns Forex Reviews a quarter of the company’s shares. The company grows, and therefore it needs more capital. What it can do is to issue more shares to other investors.

If the company continues to grow, it may need more investors, a bigger number than the private investors can offer. At this junction, the company can take the path to an initial public offering, where it will transformed into a public company.

Common Stocks

As the name suggests, this is the most common type of stock found in the markets. So when you hear some people talking about stocks, they almost certainly refer to common stocks. In addition, a really huge proportion of stocks are issued in this form.

If you’re holding common shares, you have a claim on the company’s profits, called dividends, and you are granted with voting rights. Generally, investors get one vote per one share that they own to select board members, who are tasked to oversee the most important decisions made by the management.

Overall, common stocks usually yield higher returns when compared to corporate bonds. On the flip side, higher returns also mean more risks, including the possibility of losing all of your invested money if ever the company goes bankrupt.

Preferred Stocks

Preferred stocks act like bonds. They also almost always do not come with voting rights, depending on company that issues them.

If you are holding preferred shares, you receive fixed dividends unlike common stocks, which have varying dividends that the board of directors declare and never guaranteed. More often, companies that issue common stocks do not pay any kind of dividend at all.

If ever the company goes out of business and you’re a preferred stockholder, you will paid off first before common stockholders, though you still have to wait until the company paid off debt holders and other creditors.

In addition, the preferred stocks you are holding may be bought back by the company at any time for any reason. You can then imagine preferred stocks as a combination of bonds and common shares.

Why do stocks have different kinds?

The most common reason why stocks are of different kinds is that the company or the board wants the voting power to be concentrated in a certain group of investors. What the company does then is to bless different stocks with varying degrees of voting rights. Some stocks give you 10 votes per share, while others only give one vote per share.

Conclusion

The stock market is a very lucrative industry offering a lot of choices that will let you hope for bigger earnings. It is imperative that you learn about and understand your choices before you can come up with a decision and an investing strategy.

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