There are two main types of stocks: common stock and preferred stock.
Common Stock
Common stock is, well, common. When people talk
about stocks they are usually referring to this type. In fact, the
majority of stock is 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.
Preferred Stock
Preferred
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; therefore, 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), 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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