Stock Market

Different Types Of Stocks

Not all stocks are created equal. In the United States there are two essentially different types of stock, and each type of stock can have one or more classes of stock depending on the structure of the corporation issuing the stock. Stocks are classified as either common or preferred stocks.

Common Stocks

As the name suggests common stocks are the most common type of stock issued by a corporation. The vast majority of stocks traded are common stocks. When you purchase a share of common stock you become a partial owner in the company whose stock you purchased. With common stock you also have the right to vote for board of director members, for each share of common stock you own in a company you get one vote. Common stockholders also have the right to vote on other matters within the company as will, such as stock splits.
Common stocks also pay a dividend that fluctuates with the strength of the company. Even though this can be more risky than having a fixed dividend (and can even fall to zero if the company is having problems), common stocks typically pay higher total dividends over their life than preferred stocks.

Preferred Stock

Preferred stocks also give the shareholder partial ownership in the company whose stocks have been purchased, but without any of the voting rights of common stocks. So while the holder of common stock can, theoretically, influence the direction and activities of the company, the holder of preferred stock cannot.
The benefit of preferred stock comes in two ways. First the holder of preferred stock is paid a fix dividend, which mitigates risk for the investor. Secondly, preferred stockholders are paid dividends first, and are paid before common stockholders if the company goes bankrupt.

Classes of Common Stock

Common stock normally offers one vote per share of stock, but sometimes a company may choose to offer classes of common stock that change the number of votes per share for the holder. So if a company offers a Class A and Class B stock, the Class A stock may entitle the holder to 5 votes per share while the Class B stock would entitle the holder to 1 vote per share.