Stock Exchange Basics – Kinds Of Stock

Common Stock

This suitably named sort of stock is what most of the people refer to when they’re talking about stocks. A lot of shares that firms issue are that of common stock. These kinds of shares represent possession in an enterprise and a claim to the profits the company generates. Investors have entitlement to one vote per share which permits them to elect board members, who watch over management.

In a well run company, over the long term, shares will appreciate which should provide investors with better returns than any other investment. Naturally, that higher return comes from taking on higher risk. If the company liquidates due to insolvency, the common investors lay claim on the assets of the company once bondholders, creditors and preferred stockholders are paid.

Preferred stockholders? Are some investors more special than others?

Preferred Stock

This sort of possession doesn’t come with the same voting rights as common investors ( though some companies permit preferred shareholders a vote ). Preferred shareholders also receive a fixed dividend for ever and ever unlike common investors who’s dividend is some distance from guaranteed . In the case of an insolvency, preferred stockholders receive payment before common stockholders. Bondholders get paid first however. A company can purchase the shares of a preferred investor anytime. Frequently there’s a premium offered to the investors.

In the most straightforward of terms, preferred shares are somewhere between bonds and common shares.

Classes of Stock

Lets go back to our example of you being the owner of a successful family business. You decide that for the company to grow, you want to either take on debt to finance the expansion, or you can dip into the equity market and offer partial possession to potential stockholders. Nevertheless you need to make sure your family maintains complete command of the firm’s future. What can be done is to line up different classes of shares, whereby one class of common stockholders would have ten votes per share, while the other class would have just one vote, and the bulk of stockholders would hold this class of shares.

For instance, your folks may own a hundred shares of ABC Class A shares, where one one share equals a hundred votes. The remainder of the shares would be one thousand shares of ABC Class B shares where one share equals one vote. Regardless of if somebody owned all one thousand Class B shares, they would never be in a position to outvote the family.

There are typically many incentives for setting up shares in this way. The ticker symbols look like this : ABC.A, ABC.B, ABCa or ABCb.