Online stock trading can be tricky, especially since many people go into without having a real understand of what a stock is. It’s true! Most people drop the word stocks in casual conversation like everyone knows what a stock is, but in fact, very few people have a real understanding of the stock market. In this discussion I’ll provide you a foundation for comprehending the primary 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.
The second main kind of stock is the preferred stock. This type of stock enjoys a greater ownership role in the corporation. This doesn’t mean it has the same voting rights, but it usually does provide guaranteed fixed dividends.
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.
People frequently refer to preferred stocks as debt not equity. It might help to see them as a mix of 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.
You’ll find a wide variety of definitions here, but generally speaking a penny stock trades for under five dollars and a micro cap stock has a market capitalization between 250 and 50 million dollars. One last delineation for a penny stock is any stock traded off a security exchange and traded on the OTCBB or the Pink Sheets.
The bottom line with penny stocks is that they’re just plain more risky, so keep that in mind when you start delving into their world.