Different Types of Stock
There are two main types of stocks: common
stock and preferred
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.
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".