Types of Stock
Common Stock
Some companies may not only split up their owner's equity into one type of stock or shares, but also into different types of stock. There are two main types of stocks, common stock and preferred stock. and the first one that we will talk about it common stock. Common stock is just like it describes itself, it's more common. Generally, when people are referring to stocks they are talking about common stock. Common shares represent ownership in a company, and a claim on a portion of the profit, usually through dividends. It's okay if you are not familiar with the term dividend, it is something that we will be covering in further lessons Once you are a shareholder you have one vote to elect board members of the company. These board members oversee the major happenings within the corporation. While common stock carries the most risk, it has also historically produced the most profit over the long-term.
Preferred Stock
Preferred stock represents also represents ownership in a company, albeit with less rights as a shareholder. If you own a preferred stock, then you don't have the same voting rights as a person who owns a common stock. This means that when it is time to elect new members for the board of a company, you will not be able to vote. Unlike a common stock, preferred stock usually guarantees a fixed dividend, meaning the dividend rate will not change while you own the stock. One other advantage of owning a preferred stock is that there is less risk attached to owning the company. Let's say that the preferred stock you own liquidates, meaning that the company terminates the operation of their business by paying off their liabilities with assets. That scenario is not very good for you as a part owner, however with a preferred stock if the company does liquidate, then you are payed your money before the common stockholders in the company. Another thing to note is that the company can buy back your shares from you at any time if they want, thought it would be at a premium of your initial investment. Some people think of a preferred stock as a comforting niche between a bond where you are lending money with interest for no risk, and a common stock which is high risk, high reward.
In this lesson, you should have learned what it means to own common stock and what it means to own preferred stock. You should have also learned some of the basic differences between these two types of stock. So, onto the next lesson!