Corporations typically issue two different types of stocks: common and preferred. These represent the major classifications of stocks. Common stock is an investment security which represents ownership in a company. Holders of common stock are usually allowed to vote to elect a company's board of directors and receive dividends paid out by the company. Preferred stock is an investment security which may, depending on the company, represent ownership and which is also a debt instrument of the company. Because preferred stock combines aspects of debt and investment securities, they can be seen as falling somewhere in between common stock and bonds. Preferred stockholders have greater security and are paid set dividends at regular intervals, but rarely have voting rights.
Stocks differ from bonds, which are a form of debt equity, and which have their own market and set of risks. A traditional corporate stock definition does not include bonds. Many companies offer all three types of securities: bonds, common stock, and preferred stock.
Common Stock
Common stock yields the highest rates of return in the long run, and grants the stockholder voting rights. The voting rights typically extend to voting for the board of directors and voting on corporate policies. It is a riskier investment than preferred stock or bonds, however, because if a corporation is liquidated, the common stockholders receive their money only after the creditors, bondholders, and preferred shareholders have been paid. The benefit of common stock is that it often outperforms bonds and preferred stocks in the long term. Many corporations offer common stock, such as Wells Fargo & Company, which issues common stock on the New York Stock Exchange (NYSE: WFC).
Preferred Stock
Unlike common stockholders, preferred stockholders typically do not have voting rights. They do have priority over common stockholders in the payment of dividends. The dividends for preferred stock are typically paid either monthly or quarterly, and typically are either fixed or set in terms of a benchmark interest rate. If a company is struggling to pay its dividends or is liquidated, the preferred stockholders will be paid before the common stockholders. Preferred stock offers more predictable income than common stock. Along with common stock and bonds, Wells Fargo & Company also offers preferred stock, such as its Series L (NYSE: WFC-L).
Other Types of Stock
Although common and preferred stock are the two main types of stock, stock options may be customized by a corporation for various reasons, such as to give privileged voting rights to the owners of a certain class of stock. There are also some other classifications of stock, such as growth stock, stock which is expected to grow at a faster rate than the overall market, and value stock, stock which appears to be undervalued in relation to its dividends, earnings, or sales.
An additional distinction is made between large-cap and small-cap stocks. Large-cap stocks are frequently traded and tend to be more stable. Small-cap stocks are stocks from new companies and more prone to change.
Examples
There are many examples of companies which offer stock. Thousands of companies are listed at the two major stock exchanges in the United States, NASDAQ and the New York Stock Exchange (NYSE). Stocks from the following ten companies were the most traded on nasdaq.com in 2020:
- Tesla (TSLA)
- Apple (AAPL)
- Amazon (AMZN)
- Microsoft (MSFT)
- Nio Limited (NIO)
- Nvidia (NVDA)
- Moderna (MRNA)
- Nikola (NKLA)
- Facebook (FB)
- Advanced Micro Devices (AMD)
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Stock trading is attempting to profit from buying and selling securities, such as stock. Stock traders include individuals trading on their own behalf and professional traders who trade on behalf of a company. The goal of a stock trader is to make short-term gains on the fluctuation of stock prices. Traders are important for the stock market because they ensure that there are enough buyers and sellers in the market to buy and sell stock easily.
Different traders bring unique approaches to trading. Informed traders use technical analysis to guide their choices of what to buy and sell. Other traders are uninformed, and trade on active and volatile stocks, hoping to make a profit. Still another group of traders uses their intuition and trading experience to determine what stocks to buy or sell. Stock traders also differ in how long they hold on to stocks before selling them. Day traders never hold a stock overnight, while swing traders buy from a company when the stock price is trending upward and attempt to sell when the price has reached its peak.
Stock trading, meaning the pursuit of profit by exchange of stocks, should not be confused with stock investing. Stock investing refers to buying stock and holding on to it for a long period of time, in hopes that the stock will gradually increase in price. Investors, unlike traders, also receive dividends.
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A stock is a financial instrument which represents partial ownership of a corporation. Stocks are issued by companies in units called shares. Investors who buy the shares help the company raise funds, and in return the shareholder shares in the companies assets and profits. Stock investors buy stock in the hopes that the value of the stock will increase over time. They also receive dividends, money payments with which the company rewards its stockholders. Venues where stocks are issued, bought, and sold are called stock exchanges.
The two main types of stock are common stock and preferred stock. Common stock represents are partial ownership of a corporation, and grants the stockholder voting rights. Common stock is less secure than preferred stock but is typically more profitable in the long run. Preferred stock may represent ownership in a company, depending on the company, and is a debt instrument of the company. Preferred stockholders are often paid dividends at regular intervals, and they have priority over the common stockholders in the payment of dividends. Preferred stockholders typically do not have voting rights.
Stock trading refers to buying and selling stock in order to profit from short-term fluctuations in stock prices. Stock traders can be informed, uninformed, or intuitive traders. They may be day traders, who don't hold stocks overnight, or swing traders, who try to capitalize on stocks which are trending upwards. Stock trading differs from stock investing. Stock investors buy stock and hold on to it for a long period of time, hoping to profit from the stock's increasing price and by receiving dividends.
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Video Transcript
Definition of Stocks
There are two types of stock. The first is common stock, which is typically what is meant when referring to 'stock'.
Common stock is an investment security which represents ownership in a company. You may hear a friend or relative state they own stock (commonly referred to as shares) of a particular company. They are referring to common stock. If your friend or relative owns a few shares of that company, they are therefore an owner of the company.
Preferred stock is an investment security which, depending on the issuing company, can represent ownership in a corporation along with being a debt instrument of the company. Companies typically issue common stock to raise proceeds to expand, pay down or pay off debt. When a company 'goes public,' those proceeds are often used also to expand or reduce debt.
Types of Stocks
Common and preferred are two very different types of stock. As we will see, companies issue the two stocks for different reasons. The risk and potential reward to the investor can also be very different.
Common stock represents ownership in a company. By owning part of the company, you share in both the good times and the not-so-good times of the company. A benefit of being an owner includes the receipt of any dividends paid by the company. Also, if the company experiences growth of sales and profits, hypothetically, the dividend and stock price will increase, increasing your investment performance.
In addition, most common stock is classified as 'voting stock,' which allows stockholders to vote for (or against) the board of directors and various shareholder proposals. It is important to note that common stock dividends are never guaranteed, and neither is share price appreciation.
Common stock certificates have historically been issued, like the one for Gerber you're looking at on screen now, but due to progressive technology, most shares are now electronically issued.
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Preferred stock typically is a debt instrument of a company. When purchasing preferred stock, think as though you are loaning the company money. When loaning money to a friend, you expect to be paid back with interest. Preferred stock works in a very similar fashion. It may be issued at $25 per share and may trade on the stock market.
However, instead of sharing in the profits through hopefully increasing dividends and share price growth, preferred stock owners (similar to bondholders) receive fixed dividend payments. Some preferred stock may be convertible to common stock, but this depends on the way the preferred stock was issued.
Preferred stock dividends typically must be paid prior to a corporation issuing dividends to common stock holders. As a result, for this risk premium, common stockholders typically experience greater returns than preferred stock holders. It is important to note that past performance of common stocks and preferred stocks is not a guarantee of future performance.
Examples of Stocks in Play
Let's use Grandma's Holiday Pies, a fictitious company, as an example. Grandma's Holiday Pies is a publically traded company (which means anyone eligible to invest can purchase shares). If Grandma's has a total of 100 shares, and you buy 1 share, you now own 1% of the company. If Grandma's becomes popular nationwide, hypothetically, the stock price will increase. If Grandma's pies are deemed unhealthy, less people might buy the pies, resulting in a stock price decline.
If Grandma's wanted to expand operations, they may go to the preferred stock market to borrow money. Rather than owning part of the company, you become a creditor of Grandma's. A preferred stock holder is paid dividends on the preferred stock. If Grandma's issues preferred stock with a par value of $25 at a 5% interest rate, Grandma's will send you a check for $1.25 every year (although the dividend is typically paid in quarterly installments). The risk with preferred stock is that the company won't be around to pay you the dividend.
However, you should know that preferred stock claims are higher on the capital structure than common stock; in case the company declares bankruptcy, preferred stockholders will recover losses prior to common stock holders.
Stock is not limited to that of publicly traded companies. Local corporations may have shares of stock, too. These may or may not be open for public investment. Local corporations such as bowling alleys typically allow investors to purchase shares; however, a medical corporation, such as a doctor's office, may just have one shareholder - the doctor.
Lesson Summary
As a recap, there are two types of stocks; common and preferred stock. Common stock is an investment security, which represents ownership in a company. When you purchase common stock shares, you own a percentage of that company depending on the number of shares you purchased and the number of shares that are available. As a result of ownership, common stock is typically riskier than the other type of stock, preferred stock, but the long-term performance may also be better due to the extra risk you are taking as an investor.
Preferred stock is an investment security which, depending on the issuing company, can represent ownership in a corporation along with being a debt instrument of the company. The benefit of owning preferred stock over common stock is that the dividend of preferred stock is typically fixed and must be paid prior to common stock holders receiving dividends.
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