Stocks are a type of security provided by companies to obtain funds to invest in their business. A share is a unit of participation in the stock of a company; we will be using both terms interchangeably.
In exchange for your cash companies will offer you a share in the business, the profits or some other type of rights over their activities. The key factor to understand with stocks is that nothing is guaranteed, if the company you buy stocks in files for bankruptcy or flops you get nothing. However if the company your buy stocks in does well, your $100 dollar stock could turn into thousands or even hundreds of thousands of dollars. It is a little like betting on a horse at the races, if you win you hit the jackpot if you lose you walk home with nothing.
As mentioned above the rights granted by the ownership of stock change depending on the charter and bylaws of the corporation you buy into. Generally this includes a right to share in the dividends (that means a share in the profit distributed to shareholders), vote for the board of directors and other corporate changes and even to inspect the books of the corporation. In some cases shareholders might even have the privilege of “pre-emptive right” on any new stock that is issued by the company.
A stock is a document that provides evidence of ownership or share of ownership in a company. Stocks are generally issued to the bearer, avoiding loss is therefore a priority. That is why certificates are often entrusted to commercial banks or clearing agencies that handle the safekeeping and transfer of shares.
In some countries like the United States, certificates are registered in the name of the owner or in a “street name” the name of the owner’s broker or bank. However, investors for legal or personal reasons may still prefer to keep their stock certificates in their own name.
What Kind of Stock do You Want?
Companies can issue different kinds of stock with different benefits and rights. Which kind of stock is right for you will depend on your circumstances, investment goals and availability.
Preferred Stock.
Preferred Stock is a type of stock that provides preferential treatment when paying dividends and when the corporation is dissolved to the division of assets. It is therefore considered a safer type of stock.
Preferred Stock often includes a fixed rate of dividend payments which is cumulative if the company decides it needs to omit a distribution. If a dividend distribution is missed on a preferred stock the full deficiency must be paid before payments can be made on common shares.
Apart from these added benefits preferred stock also provides a share in whatever earnings are paid to the common stock.
Why do companies offer Preferred Stock?
It is generally used as an added incentive for stock buyers when the corporation is financially weak. Depending on the company’s charter Preferred Stock holders may or may not have the right to vote. Typically preferred stock holders only are allowed to vote when some condition is met like if the company has failed to pay a certain number of dividend payments.
Common Stock.
Common Stock, also called ordinary shares represent a residual interest in the earnings and assets of a corporation. Common stock is the poor relative to bonds and preferred stock when it comes to dividend payments. Dividends to bonds and preferred stock are generally fixed, payments to common stock however are set at the time of payment by the company directors and depend on the earnings or profit of the corporation. This makes common stock a more volatile type of stock security with price depending on the investors’ expectation of future earnings. Of course this makes trading in stocks a more risky activity but also a potentially more profitable one if you choose the right company.
There are many ways to offset the risk of stock trading while still benefiting from the high rate of profit stock shares can provide. These include buying from a variety of blue chip companies to spread the risk on a number of established and historically profitable companies.
