3) Stocks Basics: Different Types Of Stocks

by · August 25, 2010

The two main types of stocks are common stock and preferred stock.

Common Stock

This is the most common type of stock available to the public, hence the term “common stock.” A majority of the stocks are in fact issued in this form. When people discuss stocks in the market, they are usually referring to this type of stock.

When you purchase common stocks, you become part owner of the business in a way. Stocks are bought in shares. The more shares you have, the bigger your share of the profits (commonly referred to as dividends) and the greater your voting power will become. Investors usually get one vote per share. Voting is a privilege given to a shareholder and are used in situations such as as the election of the board members who oversee the major decisions made by management.

Preferred Stock
The main difference of a preferred stock from common is that, with preferred shares the investors are normally guaranteed a fixed dividend.  Common stocks have variable dividends depending on the performance of the company.  As a preferred stockholder the investor still has a degree of ownership on the company, but the right to vote usually doesn’t come with it.  This varies from one company to another.

Another advantage of having preferred stocks is that the preferred shareholders will be paid before the common shareholders in the event of a liquidation. However, at any time, the company has the option to buy back the shares of preferred stockholders for any reason. Preferred stocks are purchased by investors for the sole purpose of monetary gain only.

Preferred stock can be further subdivided into 4 variations. These are: adjustable rates, convertible, participating and voting.

Different Classes of Stock
A company may choose to customize different classes of stock in the way they want. One of the common reasons is that the company wants to place the voting power to a select few groups or investors. In this case classes of shares are offered with different voting rights. One class might have 10 votes per share, while the other class will only have 1 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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