Types of Stock

There are two main Types of stock that you as an investor can own in a company - Common Stock and Preferred Stock



Let's discuss each one of them:

Common Stock

Common Stock means exactly that - common. When you hear most investors talking about the type of stocks they own - more often than not they are referring to common stock.

In fact majority of the stock that is issued in the market is common stock.

Generally, the following are some of the features of common stock

1. They represent ownership stake in a company.

2. They give you as the investor voting rights. This means that you get one vote per share to elect board members, who oversee the major decisions made by management.

3. Depending on whether the company pays dividends and the criteria it uses, you may be entitled to dividend. Dividends are never guaranteed.

4. They yield higher returns but come with higher risk. If the company ever went bankrupt an investor with common stock in the company will not be paid until creditors, bondholders and preferred shareholders are paid.

Preferred Stock

Here are features of preferred shares:

1. Preferred stocks differ from common stocks in that typically, they do not carry voting rights (this may very well differ with the company).

2. Investors who hold preferred stock in a company may be entitled (legally), to receive a certain level of dividend payments (forever) before any dividends can be issued to other shareholders.

3. In the event that the company goes under, preferred shareholders will be paid off before the common shareholder (but still after debt holders).

4. Preferred stocks may also be callable. This means that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium).

Think of preferred shares more like debt than equity - a cross between bonds and common shares.

One last point and then am done - Some preferred stocks are called convertible preferred stock. This is because they include an option for the investor to convert the preferred shares into a fixed number of common shares, usually after a predetermined date.

Different Classes of Stock

Like I mentioned at the beginning of this article, common and preferred are the two main forms of stock.

However, companies may choose to customize the different classes of stock in any way they choose.

Reason? If they want the voting power to remain with a certain group. This may mean giving the different classes of shares different voting rights.

For example - A class of shares may be held by a select group who are given fifteen votes per share. Another class may be held by 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.

Warren Buffet's Berkshire Hathaway (ticker: BRK), 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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