Types of Stocks

Types of Stocks

There are two main types of stocks that are offered by any company such as follows:

  • Common Stocks

Common Stock is a ‘voting stock’. Hence, any individual who has purchased the common stock of a company is entitled to vote for appointing the officers of the company and it’s Board of Directors.  Thus, common stock is the ownership share in publicly held company.

Common stock holders have a residual claim on a company’s assets.  Each common stockholder or shareholder of a corporation is entitled to certain rights and obligations.  Thus, each common stockholder has the right to vote.  Moreover, if a common stockholder is not able to vote in person, he can give a written consent to give permission to someone else to vote on his behalf as a proxy.

Also, a common stockholder has a right to limited liability. Hence, in cases where the corporation is found liable for an act, the shareholders cannot be held responsible.

One of the greatest benefits of common stock ownership is that such stockholders may receive payment of a stock dividend. So, instead of receiving cash for your shares, you receive additional shares in the company’s stock.

Moreover, a common stockholder also enjoys certain other privileges. So, if the company decides to sell additional shares of stock, common shareholders have certain pre-emptive rights which entitle them to purchase the shares before they are offered to the public.

Key Asset Classes for Common Stocks:

Large Capitalization / Large Cap Stocks = Large Cap stocks are stocks of companies with market capitalization (shares outstanding times’ price) of greater than $10 billion.

Mid Capitalization / Mid Cap Stocks = Mid Cap stocks are stocks of companies with market capitalization of between $2 billion and $10 billion.

Small Capitalization / Small Cap Stocks = Small Cap stocks are stocks of companies with market capitalization of less than $2 billion.

  • Preferred Stocks

Preferred Stock’ as the names suggests has a preferential position over common stock.  Therefore, during the payout of dividend to share holders, it is first paid to preferred stock owners before common stock holders.

Preferred stock is also ownership shares of a company.

However, it differs from common stock because in preferred stocks, the dividend is guaranteed and paid before dividends on common stock are paid.  On the other hand, if profits of the company increase, the dividend for preferred stocks isn’t increased accordingly.

The major benefit of preferred stock is that it pays a fixed cash flow to investor and ensures a steady dividend stream. Owners of preferred stock investors face great risks such as that of interest rate risk, call risk and default risk.

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