Getting into the stock market can feel a bit overwhelming at first. There’s a lot of talk about different kinds of investments, and it’s easy to get lost in all the jargon. But don’t worry! When it comes to company shares, there are really just two main kinds you need to know about: common shares and preferred shares. Understanding these 2 types of stock is a great first step for anyone looking to start investing. We’ll break down what makes each one different so you can get a clearer picture.
Key Takeaways
- Common shares give you voting rights in a company, letting you have a say in how things are run.
- Preferred shares usually don’t come with voting rights, but they offer a different kind of benefit.
- Owners of preferred shares typically get paid dividends before common shareholders do.
- If a company goes out of business, preferred shareholders usually get their money back before common shareholders.
- The value of common shares tends to change more with how the company is doing, while preferred shares are often more stable.
1. Common Shares
So, you’re thinking about getting into stocks? Well, let’s talk about the most common type: common shares. These basically represent ownership in a company. When you buy common stock, you’re buying a tiny piece of that business. It’s like saying, "Hey, I believe in what you’re doing, and I want to be a part of it."
Now, what does that actually mean for you? Here’s the deal:
- Voting Rights: As a common shareholder, you usually get to vote on important company decisions, like electing board members. Each share typically equals one vote. It’s your chance to have a say in how the company is run.
- Dividends: If the company is doing well and making a profit, they might decide to pay out dividends. This is basically a portion of the profits that gets distributed to shareholders. However, it’s not guaranteed. The company can choose to reinvest the profits back into the business instead.
- Capital Appreciation: Hopefully, the company grows and becomes more valuable over time. If that happens, the price of your shares will likely increase, and you can sell them for a profit. Of course, the opposite can also happen, and you could lose money.
Investing in common stock involves risk. The value of your investment can go up or down, and you could lose money. It’s important to do your research and understand the risks before investing.
One common approach is to invest in many stocks through a stock mutual fund. This helps diversify your portfolio and reduce risk. Another thing to keep in mind is that the share price could be lower still, and some brokers, like Fidelity and Charles Schwab, don’t charge commissions for trading stocks, which can save you money.
2. Preferred Shares
Preferred shares are a bit different from common shares. Think of them as a hybrid between stocks and bonds. They offer some advantages that common stock doesn’t, but also come with their own set of considerations.
One of the main attractions of preferred shares is that they typically pay a fixed dividend. This can provide a steady income stream for investors, which is especially appealing to those looking for more predictable returns. Unlike common stock dividends, which can fluctuate based on the company’s performance, preferred stock dividends are usually set at a specific rate.
Another key difference is how preferred shareholders are treated in the event of bankruptcy. Preferred shareholders have a higher claim on assets than common shareholders, meaning they’re more likely to get some of their investment back if the company goes under. However, they still rank below bondholders and other creditors.
Here’s a quick rundown of some key features:
- Fixed dividends: Provides a predictable income stream.
- Higher claim on assets: Offers more protection in bankruptcy than common stock.
- Often callable: The company may have the option to buy back the shares at a set price.
Preferred shares can be a good option for investors seeking income and a bit more security than common stock. However, it’s important to understand the specific terms and conditions of the preferred shares before investing, as they can vary widely from company to company. Also, preferred shares usually don’t have voting rights, so you won’t have a say in how the company is run.
It’s also worth noting that preferred shares can be less liquid than common stock, meaning they might be harder to sell quickly without affecting the price. So, if you need easy access to your money, preferred shares might not be the best choice. Consider stock allocation and your overall investment goals before deciding if preferred shares are right for you. Also, remember to check out different brokerage platforms before investing.
Wrapping Things Up
So, we’ve gone over the two main types of stock: common and preferred. It’s pretty clear they each have their own set of pros and cons. Common stock gives you voting rights and a shot at bigger gains, but it also comes with more risk. Preferred stock, on the other hand, is a bit more stable, offering regular payments and priority if the company goes under, but you usually give up those voting rights. Knowing the difference between these two is a big deal for anyone looking to get into the stock market. It helps you figure out what fits best with your own money goals and how much risk you’re okay with. Think about what you want to achieve, and then pick the type of stock that makes the most sense for you.
Frequently Asked Questions
What’s the main difference between common and preferred stock?
Common stock gives you a say in how the company is run through voting rights. Preferred stock usually doesn’t come with voting rights, but it offers other perks, like getting paid back before common stockholders if the company goes out of business.
Can a company have both common and preferred shares?
Yes, companies sometimes offer both common and preferred stock. They do this to attract different kinds of investors.
How do dividends work for each type of stock?
Common stockholders get paid dividends if the company decides to pay them, and the amount can change. Preferred stockholders typically get a fixed dividend payment, and they get paid before common stockholders.
What happens to common and preferred stock if a company goes bankrupt?
If a company goes bankrupt, preferred stockholders usually get their money back before common stockholders do. Common stockholders are last in line.
Which type of stock is riskier?
Preferred stock is often seen as less risky than common stock because of the fixed dividends and the priority in case of bankruptcy. However, common stock has a higher potential for big gains if the company does really well.
Is one type of stock easier to buy or sell than the other?
Common stock is usually more common and easier to buy and sell on the stock market. Preferred stock can be a bit harder to trade because there’s less of it out there.
Peyman Khosravani is a global blockchain and digital transformation expert with a passion for marketing, futuristic ideas, analytics insights, startup businesses, and effective communications. He has extensive experience in blockchain and DeFi projects and is committed to using technology to bring justice and fairness to society and promote freedom. Peyman has worked with international organizations to improve digital transformation strategies and data-gathering strategies that help identify customer touchpoints and sources of data that tell the story of what is happening. With his expertise in blockchain, digital transformation, marketing, analytics insights, startup businesses, and effective communications, Peyman is dedicated to helping businesses succeed in the digital age. He believes that technology can be used as a tool for positive change in the world.
