For those who want to enter the stock market and become an owner of a company and earn a small part of the profits it produces, it is important to have an understanding of the different types of stock. First of all there is “common stock” which, as the name implies is common. When you hear people discussing stocks, this is usually the type they are talking about. Most stocks are actually issued as common stocks. They are the kind of stocks which allow stock holders to be owners in a company as well as a claim on a part of the profits (dividends). Investors in common stock are given one vote per share when it comes time to elect the members of the board of directors. The Board of Directors are those who will oversee the important money making decisions made by the company’s management.
Historically, common stock, over a long period of time, experiences capital growth, and has come to where it yields a greater return than most other forms of investment. Though it may experience this high growth factor it comes at a price referred to as risk. Essentially this means that should the company go bankrupt the shareholders of common stock will be last in line to receive any of the liquidated proceeds. They will have to wait for creditors and bondholders to be paid first then they will divide what remains.
Preferred stock is different in several ways from common stock. There is a certain amount of ownership implied by this stock but generally it doesn’t include the right to vote on board members. The advantage, however, to this form of stock is that it comes with a guaranteed fixed dividend amount for the life of the company. In addition to this advantage preferred stockholders are paid before common stock holders in the case of bankruptcy. It is also a “callable” stock, which means that when the company wants to they can purchase this stock back from the shareholders whenever they wish for whatever reason they want. But, it is generally purchased at a premium.