What are the different types of Stocks?
Posted by Efraim Landa
The basic difference in stocks and bonds is that bonds are a debt while stocks are part ownership in a company. These are both valid and profitable ways to raise capital for a business. Effi Enterprises offers advice to companies which need to create value. They can help businesses achieve their financial goals and offer them many strategies for financial advancement to expand their marketing potential. There are many options for today’s business owners including stocks and bonds. There are two different types of stock options for investors to choose from.
Common stocks are the most common and most of the stocks that are issued are common stocks. These stocks actually represent partial ownership in a company and therefore will receive dividends as a result. Those who purchase stocks are investing in the company so that the company can expand and realize profit. Each investor will also get one vote for each share that is purchased. With this vote they will elect board members who will make or oversee all the management’s major decisions. This type of investment usually offers some of the highest returns over other investment options. Of course this is also associated with more risks as well. If the company is forced to liquidate those who hold common shares will not receive any money until after the creditors including bondholders have been paid.
The preferred stock also represents some ownership in a company, but without the same level of voting rights. Investors who purchase preferred shares are typically guaranteed a dividend which is fixed and ongoing. With common stock the dividends are not guaranteed at any time. And should the company be forced into liquidation, the preferred stock owner has a slight advantage over common stocks. They would be paid off after the debt holders, but before the common stockholders in this event. Preferred stock is also “callable.” This means that the company can choose to purchase the shares from the shareholders any time they decide to and for any reason. There are many who think that preferred stocks are more like a debt than equity. One way to classify them is to think of them as sitting between bonds and common shares in a company.
Different Classes of Stocks
Even though common and preferred stocks are the two basic types of stocks, companies always have the option of customizing their particular stocks into any package they feel will be appealing to their stockholders. Usually when stocks are customized it is because the company wants the voting power to be contained within a particular group. This way the company can classify the stocks so that they can manage their voters and still achieve the financial objectives. For instance they can set it up so that one group of stocks allows ten votes per share and another class of stocks only gets one vote per share. Berkshire Hathaway is an example of a business who offers more than one class of stocks. Usually they are assigned terms like Class A stocks and Class B stocks.
Advantages for Stockholders
Even though a person becomes a stockholder in a public company does not automatically mean that they have a large say in the day to day operations of the business. They will have the right to vote to elect a board of directors and thereby have some say in how the business is run. The goal is for it to all work together in the end so that the business benefits and can become more profitable from the investment; and the shareholder can profit from the company’s overall profits as well.