Understanding the Kinds of Stocks
As you delve into the world of online stock trading, you should make sure you have a strong grasp on the basics. For example, everyone hears terms like stocks and stock trading all the time. But you would be surprised how many people don’t actually understand stocks at all. With this article I’ll get you started with a discussion of the different types of stocks.
The most common type of stock is, you guessed, the common stock. In most cases, when people mention stock they are discussing common stocks. A vast majority of issued stock is this type of stock. With common stock, the shares indicate the sharing of ownership of a corporation as well as the sharing of the profits through dividends.
Long term, through capital growth, common stock provides greater returns than most other investment types. However, this comes at a price as such stocks also feature a higher risk than most other investments. For example, if a corporation in which you’ve invested suddenly files for bankruptcy and liquidates, shareholders don’t receive payout until preferred shareholders, creditors and bondholders are paid.
Another closely related type of stock is the preferred stock. Preferred stock indicates a kind of ownership in the corporation yet doesn’t, in most cases, include the same voting rights. However, preferred shareholders in most cases enjoy a fixed dividend guarantee.
Fixed dividends are a very potent benefit over common stock because those common stocks have varying dividends, never guaranteed. Preferred stockholders are also paid out before common stockholders during bankruptcy and liquidation. Preferred stocks also provide the benefit, in most cases, of being callable. When a stock is callable, a corporation can buy that stock at any time, most commonly at a premium price.
Some folks consider preferred shares to be a kind of debt instead of being an equity. You might consider them as a cross between a bond and a common stock.
While preferred and common are the primary types of stock, corporations can create separate classes of stock for separate purposes. The obvious reason for this classification system is so that the corporation can control voting rights, giving votes to one class of stocks and not the other.
Regardless of whether it is a common stock or a preferred stock, an additional class of stock delineation will determine the voting right of that stock. Some stocks will simply have a greater number of votes on corporate policy with each owned share than other classes of the same stock.
And while it may belong in a different conversation altogether, the last type of stock you’ll see discussed among online traders is the penny stock. Penny stocks, also referred to as micro cap stocks when classifying them by market capitalization rather than stock price, are really just normal stocks traded at a lower market value. Any stock can become a penny stock and many micro cap stocks become standard stocks traded on NYSE or NASDAQ.
It can be confusing to read about penny stocks online. Partially because most people don’t really know what they’re talking about, but also because you see the terms micro cap stock and penny stocks used identically. In fact, the term micro cap stock refers to a stock with market capitalization in the 50 to 250 million dollar range while a penny stock is any stock under 5 bucks. And there is one final way to distinguish a penny stock: it is usually traded via the Pink Sheet or the OTCBB rather than NYSE or NASDAQ.
What you must consider most when evaluating a penny stock is how it will be far more volatile and susceptible to market manipulation and stock fraud.
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