A Breakdown of Different Types of Stocks
January 5th, 2008 by admin
On the surface the stock market can seem a cold place - investors snap up stocks and dump them just as quickly if they believe a downturn is near. But, there is a lot more to stocks than the daily highs and lows. As an investor you give companies the capital they need to realize their goals and aspirations. Being a stockholder means you can have influence in a company, but the type of responsibility and influence you have depends on the type of stocks you have. Being aware of these benefits of different stock types can help you decide on what the best investment choice is for you.
Stocks
Generally speaking, stocks represent ownership of a company. When you purchase a share of a company, or a stock, the firm will typically issue a stock certificate as proof of your ownership. Each type of stock, even if it falls under a certain category, can have its own defined benefits or terms as defined by the issuing company. It’s always good to have an understanding of the stock type prior to investing.
Common Stock
This is the most frequently issued type of stock. It is also the most risky type of stock. When a company goes bankrupt, common stockholders are the last to receive compensation. With this risk, comes the greatest opportunity for long-term investment. As the company yields a profit, common stock holders are entitled to dividends corresponding with the quantity of shares they own. The investors who own common stock in a company are the company’s shareholders. They traditionally receive one vote per share to elect the members of the board. However, not all common stock comes with voting rights. It is possible for stocks to be issued without including voting privileges.
Preferred Stock
What makes preferred stock so poignantly different from common stock is that the shareholders of preferred stock are usually legally guaranteed to receive a specified amount of dividend payments before all other shareholders on a fixed schedule for the duration of their ownership of the stock. In other words, they are guaranteed a certain return on their investment - no more, and no less - regardless of the state of the business. This reduces the risk involved with the investment, but it also puts a cap on the potential earnings from the investment. Additionally, preferred stock does not usually have the voting privileges associated with common stock. These matters are all clearly stated in the stock’s Certificate of Designation. Sometimes it is also referred to as “convertible preferred stock”. This means that there are provisions for the preferred shares to be converted into common stock. Usually, there is a time-frame and quantity established in the terms.
Growth Stock
When mentioning a “growth stock”, investors are referring to stocks belonging to companies with an anticipated return on equity (also called ROE) of 15 percent or more. The ROE is determined by dividing a company’s net income by their total equity. These firms are expected to appreciate in their value quickly over time, and as they grow, yield decent returns.
Initial Public Offering (IPO) Stock
The first time a company sells shares to be publicly traded is called the company’s IPO, or Initial Public Offering. At this crucial time for the company, there may be stock options available during the IPO that will not be available months later. A successful IPO is often thought to indicate a positive outlook for the company, although this is not always the case.
Penny Stock
This type of stock typically sells for less than five dollars on the market. Penny stocks are high risk stocks for businesses that are struggling to survive or that are still in their early stages. Most of these stocks tend not to fare to well, but on occasion they can, and do, surprise investors.
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