We are steadily building our financial repertoire of investment language and knowledge. Last week, we discussed the difference between stocks and bonds. Today we will discuss the different types of stocks. We will discuss the two most common ones: Common and Preferred stocks
The easiest way to define common stocks is ownership. When you purchase common stocks from a corporation, you are now part owner or a shareholder. If you have ever heard of an IPO or Initial Public Offering, then you are probably familiar with common stocks. The purpose of corporations issuing this type of stock is to raise more money so they can expand their business (you will remember this from last week’s blog). They also have voting rights on the board of directors and vote on company policies. While owning a piece of a company through common stock can be wonderful, there is a downside. If the company goes bankrupt and has to liquidate (cash in) all of their assets, the common stockholder will most likely not receive a penny! Why? There is a hierarchy of how debts are paid when companies go out of business and the common stockholder is the bottom of the list. Basically, by the time all of the other debts are paid for (e.g. wages owed to employees, debts, preferred stockholders, etc…), there is usually nothing left!
Preferred stocks also represent ownership in a company but the shareholders receiving payments or dividends, has more structure to it. The common ways shareholders receive their dividends can be monthly or quarterly. The preferred stocks have many benefits to it. If the company misses a dividend payment to its shareholders, no need to worry. Preferred stockholders are paid in arrears! An additional benefit is that it is convertible, meaning you can purchase numerous common stocks for a pre-set price. This benefits the preferred stockholder because if the price per share goes higher than the pre-set price, they will have capital gains (profits). Another benefit is the preferred stock is higher up in hierarchy and will receive dividends if the company liquidated assets before common shareholders. Downside is they do not have voting rights and it is interest rate sensitive. So if the interest rates go down drastically, the preferred stockholder most likely will NOT receive a dividend check. This can disrupt their monthly or quarterly flow of income.
We have discussed a lot today: common and preferred stocks issued by corporations. Please know there are many more features that are attached to these two BUT that is for a 1:1 meeting. While stocks are a lot to take in, if you’re understanding the basics, you are well on your way.
Note: Investments are NOT guaranteed
Next up: Bonds
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Have a beautiful and blessed week!
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